The holiday season is well under way, and the last thing taxpayers are probably thinking about is tax season. But anyone hoping to position themselves well for an interesting tax year should probably give it a little brainpower.
“For the last several years, Congress has given the taxpayers and the tax community these little jolts. They are at the point where they are making up tax laws for the year that has passed,” said Merry Brodie, an enrolled agent with Atlanta-based Brodie Accounting Services, which helps individuals and small businesses with tax planning and filing.
With taxes as a moving target, preparation is all about planning.
Here are some things Brodie says taxpayers can do right now to get ready for what’s ahead and possibly save money.
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1Get organized. Start gathering receipts and other items needed to support your 2013 returns, Brodie said. Day-care receipts, health expenses and pay stubs all act as supporting documents for your returns.
2 Review the past. Sit with your old tax returns and current pay stubs and do an estimated tax return for 2013. If you can’t do it yourself, spend about $50 to have a professional do it for you, Brodie said. The objective is to get an early idea of your tax liability so you can make proper adjustments.
3 Spend money to save money. “Everybody wants to save money on taxes and it takes money to save money,” Brodie said. Actions such as increasing your 401(k) payments or allocating money next year to medical reimbursement or dependent-care accounts require you to pay pretax money, but they also lower your adjusted gross income, or AGI. The lower your AGI, the less you owe the government. You may even be able to do something as simple as adjust the withholding on your last few paychecks of the year to help bring your tax payments in line with your tax liability.
4 Be generous. Clean the closets. If you use deductions, a simple one is to clean the closets and give items to charity. Just make sure you get signed paperwork that lists each item and its value. But be warned: A few $25 donations and a couple of Goodwill receipts are probably not going to help you much, Brodie said.
5 Know the law and act accordingly. It helps to be aware of tax-law changes, Brodie said. In 2013, for example, higher-income individuals — singles with income of $200,000 or more or couples filing jointly with income of $250,000 or more — will pay more taxes.
The minimum for medical-expense deductions for anyone under 65 increases from 7.5 to 10 percent of income. You might be able to get over the 10 percent threshold by seeking dental care, vision care or medicine now that you might have otherwise delayed.
In addition, the forgiveness debt on home foreclosures, sales-tax deduction, private mortgage-insurance deduction, teacher’s classroom-supplies deduction and residential energy-tax credit are only good for 2013. Taking action in these areas before the end of the year will put you in a position to take those deductions.
6 Pay for college. If your child or you are in college or technical training, you may be able to get up to a $2,500 American Opportunity Tax Credit. Income cutoffs for the maximum are $160,000 for couples and $80,000 for singles. So if you are within those thresholds and haven’t paid enough for college to qualify for the max this year, pay bills now to boost that credit.
7 Use 401(k) plans to cut your income. If you are just above an income cutoff for a juicy credit like the college credit, child tax credit or dependent care credit, don’t let those money-savers get away from you. An easy way to whittle a good chunk of income is to put more money into a 401(k), 403(b) or other retirement-savings plan at work. The maximum you can contribute this year is $17,500 if you are under 50; $23,000 if over 50.
But remember: If you have been putting money into a Roth 401(k) at work, that’s not cutting your taxes. For tax cutting, choose regular 401(k) contributions.
8 A hodgepodge of fees. Whether you pay a tax preparer or run up expenses for your job that aren’t reimbursed by your employer, you might be able to get a deduction. Items like unreimbursed travel for work, depreciation on a computer, union or professional dues, lawyer fees and others fall within “miscellaneous” deductions. But they have to total at least 2 percent or more of your adjustable gross income.
9 Give to charity. Seniors can give directly to charity from their individual retirement account and, depending on the amount, can cut the requirement to take distributions and pay taxes on them. At the end of 2013, this benefit disappears.
For anyone, a good way to give is to donate stocks, bonds, mutual funds or other assets worth a lot more now than when they were bought. For people worried that their holdings have soared too far too fast, giving shares to charity allows a valuable donation, and you don’t have to sell the asset and pay capital-gains taxes.
10 Sell losers. If you have capital gains on assets that you sold in 2013, you can cut your tax burden. Sell an asset that’s lost money. Any loss you have on those will offset other gains. And if you have more than a $3,000 loss, you can carry the extra over to offset gains in the future.
11 Consider the power of three. There is nothing wrong with doing your own taxes, Brodie said, but every three years it’s a good idea to have an enrolled agent — a professional qualified to represent taxpayers before the Internal Revenue Service — complete or review your work. That way, if you missed something, you will still have time to file an amended return.
This article contains information from Tribune News Service.