With smart personal or business tax planning, you shouldnt have to volunteer to pay more taxes than required.
It’s tax planning time and meeting with your accountant nowbefore the year endscan help reduce your tax liabilities. In the meantime, however, there are several things you and/or your business can do, including looking at medical expenses, charitable donations and equipment purchases, on your own to get a better handle on how much you may or may not owe.
Income taxes are partially voluntary, and people who ignore the available tax loopholes are volunteering to pay more than others. In the context of two new tax laws, the Patient Protection and Affordable Care Act (ACA) and the American Taxpayer Relief Act (ATRA), you can either structure your income and deductions to use the various provisions to your advantage in 2013 and 2014, or you can simply let the chips land where they may and deal with the outcome. Whichever the case, smart taxpayers look to find ways to keep tax costs low. So here are some ideas to help you.
Personal Tax Planning ideas
Medical expenses are deductible, but only after you exceed a floor. The floor for 2013 is 7.5 percent of your adjusted gross income (AGI), but the floor rises to 10 percent of AGI in 2014 for taxpayers under the age of 65. So the best strategy is to estimate which year has the lowest AGI and then bunch your medical deductions against that year.
Lets say that Harry has an AGI for 2013 of $50,000, but will have an AGI in 2014 of $75,000. Lets also say that he will have some elective surgery that will have out-of-pocket costs of $10,000. In 2013, Harry could be better off paying for the surgery in 2013, because he will get a deduction of $6,250 ($10,000 minus 7.5 percent of his AGI of $50,000). If he waits until 2014, he will only get a deduction of $2,500 ($10,000 minus 10 percent of his AGI of $75,000).
To get an even better deal, the best move is to see what other medical bills from 2014 you could push into 2013, by prepaying some health insurance premiums, buying eye glasses and refilling prescriptions.
Charity Begins At Home
Charity begins at home, but there may be gold in your closets. November and December are good months to clean out the closet of clothes and artifacts that arent being worn or used. But dont just bag them up and drop them off at your favorite charitable thrift store. You need to prepare a detailed list that describes the clothing (i.e. designer labels, sizes, etc.) and its condition (i.e. excellent, very good or good).
Finally, get a valuation guide from the thrift store, or online, and price out the likely used resale value. It sounds like a lot of effort, but personal experience has taught me that people are more generous than we give ourselves credit for. Taking $500 as the audit-proof threshold is probably ill advised because you may be missing out on a larger deduction. Plus, you would be required to produce this level of detail and the charitable receipts on audit anyway.
Again, the last part of the planning is to figure what year youre likely to be in a higher tax bracket. If 2014 is the higher year, then delivering the largess on January 1, 2014, is probably a better move.
Family Income Splitting
Family income splitting is another good technique to lower potential tax liabilities, especially if youre in a higher tax bracket than your children or if you might be subject to the 3.8 percent Medicare Surtax on interest, dividends, rents and capital gains. This surtax impacts joint filers with modified adjusted gross income (MAGI) of more than $25,000 on a joint return or individuals with more than $200,000. So if you can gift appreciated assets to your children, they may pay the same basic tax but avoid the Medicare Surtax. But remember, once you give something to your kids, its their asset and not yours.