At Professional Practice, Dean Vivian introduces seniors to a basic understanding of taxes and how to file their artistic earnings. The KCAI Case Study starts off the new year with Dean’s Annual tax update.
Well…I was hoping to finish my Newsletter by now, but waited to see what the “fiscal cliff” results would be. The negotiations just fell apart, so look for the Newsletter some time in mid-January. Meanwhile here are some December tax tips for this last week of the year, excerpted from the Newsletter to come:
The biggest news is we don’t know what the tax code will look like next year due to the current “fiscal cliff” negotiations falling apart. Predictions have ranged from Nothing Much Changes to All Hell Breaks Loose. There is very little we know, so there’s very little to say…so far. Ultimately, I’m writing this in late-December, and I can’t tell you what the tax code will look like in ten days. In unconscionable behavior from Washington, from both sides: there ought to be a law all tax rules for the following year be completed before the August recess.
In the meantime…IF you’re an investor wanting to sell capital gains, or a self-employed person wondering whether to take income now…well, due to lack of ANY information, do it now: take the income, sell the gain. Regarding deductions, it’s just the opposite: if you’re self-employed, that deduction may be worth more next year. Of course, we don’t know. As you can see, the current situation is unfair to all concerned. Plus, if your income is over $200K, the advice is just the opposite. Maddening.
What do we know is changing? We know some taxes are going up in 2013 due to the new Health Care law. Medicare tax will be increased 0.9% on earned income above $200K for single filers, $250K for married filers. Cap gains taxes will also be subject to a 3.8% additional rate for Medicare for folks in those income brackets. Cap gains will top out at 20% from the current 15%; assets held 5+ years will top out at 18%.
Starting in 2013, only Medical Expenses which exceed 10% of your Adjusted Gross Income will be deductible. Currently, that number is 7.5%, and will remain there for anyone 65 or over, until 2017, when it becomes 10% for everyone, so if you’re under 60 your new permanent exclusion rate as of 2013 is 10%. If you’re over the threshold now, but won’t be in 2013, get the needed eyeglasses, visit the dentist, etc., NOW.
In 2012, deductible mileage rates were 55.5¢; they’ll rise to 56.5¢ in 2013. Medical & moving mileage in 2012 was 23¢ and will be 24¢ for 2013; charity mileage remains at 14¢.
Starting in 2013, the State of Kansas will cease charging income tax on self-employment income, farm income, and rental income. Current rates for wages, now 3.5%-6.45%, will drop to 3%-4.9%. It’s a new concept aimed at bringing businesses to the state. A successful result would herald a new dawn in state taxation concepts. A failure would blow enormous holes in the Kansas State budget, aimed squarely at education. Which way will it turn out? I’ll leave it at this: even those promoting the former are publicly expecting the latter.
—If you haven’t maxed out your 401(k), dedicate your last paycheck(s) of the year to it, ESPECIALLY if you haven’t maxed out your employer’s match.
—If your employer has a Flexible Spending Account, see if they have amended it to allow exhausting it by March 15th; otherwise exhaust it by Dec 31st. (These are usually employer-sponsored plans for medical expenses or childcare.) Any unused monies remaining at the end are forfeited.
—If you’re on Santa’s “nice” list, ask The Jolly Elf for non-deductible items: clothing, furniture, etc. If it’s deductible, you’re better off buying it yourself.
—If you have investments that have dropped in value, consider selling them. The losses can be written off against other income, and you can repurchase the investment after 30 days if you choose.
—If your converted Roth IRA has dropped in value, consider changing it back to a regular IRA. The loss can be written off if you itemize.
—You can make tax-free gifts up to $13,000 /year/person, so a couple could give a couple up to $52,000/yr. (I recommend giving slightly less, at most.) You can also give up to 5 years worth, up front, as long as nothing else is given for the following 4 years. Exceptions to these limits are medical payments, made directly to the provider, and education costs, made directly to the school. It’s called the “Med-Ed” exception.
—Pay tuition or student loan payments. Make contributions to your children’s (or your 529 Plan (good for higher education costs) by Dec. 31st.
—Ask employers to over-withhold from your last paycheck of the year if you are liable for underpayment penalties. Conversely, if you’re sure you’re getting a large refund, you could ask employers to under withhold or even NOT withhold; it’s like getting an early refund.
—Check your medical expense outlays for the year; will they exceed 7.5% of your adjusted gross income? If so, pay every medical bill you have before year’s end, get needed glasses, go to the dentist, etc. If not, wait until January to pay them or incur new expenses, but be warned: the threshold goes up to 10% next year, unless you’re 65 or older.
—Prepay State Taxes (by the 31st) if you know you’ll owe or if you already pay state taxes quarterly, unless you make over $200K.
—Prepay property taxes, if your jurisdiction allows it.
—If you itemize, give as much to charity as you can, including noncash items (furniture, appliances, books, clothing, etc). Be sure to keep good records of your donations. If the donation is charged, it’s deducted the day it goes on the account; if you mail a check, it’s considered deductible the day you mail it. Again, if in a high bracket, wait until January.
—As long as you don’t carry a balance and can pay in full, charge deductible items by Dec. 31 on a bank credit card (Visa, Amex, NOT Sears, Target). Carrying a monthly balance rather than paying in full (probably) loses more than the deduction. Charging on a company card (Sears, Target) makes the item deductible when paid off, not when charged.
—If you have a 16 year old, keep in mind you’ll be losing the Child Tax Credit next year. Be sure to adjust your W-4 through your payroll person at work.
—If you and an ex-spouse trade off deducting your child(ren), either lower your exemptions (if you’re not getting the child in 2013) or raise them, to get a little bigger paycheck.
—While your at the payroll office, have you been getting large refunds year after year? You can add an exemption onto your W-4 and get a larger paycheck instead.
—Most fun: If you have large gambling winnings, take a gambling vacation to Vegas or the like; losses are deductible up to the amount of winnings. No kidding!
Happy Holidays, and here’s to a great 2013!