There are many year-end tax saving strategies and one of them is shifting income and deductions. Please see if you can shift income and deductions at year end. In order to decide which year-end moves will actually save tax dollars, you need to make following basic tax estimates and determinations.
- Estimate your income and deductions for tax year 2013 and 2014
- Based on 1 above, determine your tax brackets for both 2013 and 2014
- Determine the amount by which the income must change to move from one tax bracket to another
Let us take an example to understand this. Say you are married filing jointly and your 2013 taxable income is $200,000 falling in the 28% bracket. Your estimated taxable income for 2014 is $225,000 falling in 33% tax bracket. Shifting a few thousand dollars of income from 2014 to 2013 will cut on the tax on that income by 5 cents on the dollar. But here you need to be careful to make sure that moving income from 2014 to 2013 does not push you to higher tax bracket of 33% for 2013.
You may accelerate spending at year-end to increase your tax deductions – for example, by making year-end charitable contributions and pre-paying other deductible expenses, such as state or local taxes and mortgage interest. However if your income is on the rise, these deductions may be more valuable in 2014.
Sometimes smart year-end spending can generate deductions that would not be available if the expenses were spread out over two years. Following two examples will help you understand this.
(1) Miscellaneous Deductions: This includes unreimbursed employee expenses, investment consulting fees, custodial fees on property held to produce income, safe deposit rentals, job hunting expenses, and tax return preparation fees. These miscellaneous itemized deductions are deductible only to the extent they exceed 2% of your Adjusted Gross Income (AGI). If your 2013 Miscellaneous Expenses are already at or surpass 2% of your AGI, then you should see if you can accelerate other miscellaneous expenses from early 2014 into 2013. If with shifting miscellaneous expenses from 2014 to 2013, you do not surpass the 2% of AGI limit then it is of no help.
(2) Medical Expenses: For taxpayers who are not age 65 or older for tax year 2013, the unreimbursed/uncovered medical expenses are deductible to the extent they exceed 10% of AGI. You should total up all unreimbursed medical and dental expenses you have incurred so far in 2013 and compare that number with your 2013 estimated AGI. If the expenses are at, over, or near the 10% mark, it makes sense to accelerate what would otherwise be 2014 medical and dental expenses into 2013. For example you can move up an scheduled doctor’s visit or eye exam from January to December. You may also want to pay the full cost of an ongoing procedure, even if treatment would not be completed until next year. Please also consider overlooked deductions like: the extra cost of orthopedic shoes or special mattress for an arthritic condition, Medicare B premiums, room and board for a live-in-nurse, the cost of medical travel, the portion of a child’s tuition bill that covers medical care, medically necessary home improvements – installation of an access ramp, a walk-in shower, or even an elevator.
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