Don Grady is a CPA and Professor of Accounting at National Louis University, Chicago
There is still time for taking action prior to year end to save yourself some income tax dollars, especially if you will have income above $200,000 for the year.
On January 2, 2013, the American Taxpayer Relief Act was signed into law. I get a laugh out of the title of the act – what relief? Although ATRA made the Bush-era tax cuts for lower and middle income taxpayers permanent, for higher income taxpayers ATRA also revived the 39.6 percent tax bracket (up from 35 percent), the personal exemption phase-out and the limitation on itemized deductions. Additionally, for higher income taxpayers, the Affordable Care Act imposes a surtax on net investment income and increases the rate on the Medicare Tax.
While the new 39.6 percent income tax rate applies for individuals with income at or above $400,000, the net investment income surtax (3.8 percent) starts at a threshold of $200,000. This impacts a significantly larger group of taxpayers with incomes between $200,000 and $400,000. Also, the definition of “net investment” includes more than dividends and capital gains. It also includes rental income for those who are passive investors in the rental properties.
To the extent taxpayers can spread their income out over multiple years to reduce their adjusted gross income and investment income in any one given year will minimize the amount of tax payable. If you find yourself in this situation, it would be time well spent to meet with your financial adviser and consider triggering year-end sales of appropriate investments to offset gains with losses.
What about the rest of us in the lower and middle income brackets, what can we do to minimize our income taxes? Here are some reminders/tax planning ideas:
If you are collecting Social Security, check to see to what extent, if any, the Social Security benefits are taxable. Reducing income or increasing deductions in the current year may minimize the taxability of the Social Security benefits.
If you itemize deductions, consider:
Making an extra mortgage payment before year end to increase your interest deduction
Donating clothing, electronics or other unused assets to charity. The fair value of the items is deductible as a contribution.
Contributing the value of investments to charity. This lowers your net investment income as well as your adjusted gross income.
To all our Frugal Forum column readers, we wish you happy holidays and a prosperous new year in 2014.
• Send in your questions and ideas to: Sun Day, Frugal Forum Column, P.O. Box 7505, Algonquin, IL 60102, or, by email to: thefrugalforum@gmail.com.
