While 2013 will soon be over, there is still time to capture some last-minute tax deductions. Here are nine tips that could help you shrink your tax bill before the New Year starts:
Even if your property tax bill isn’t due until next year, making the payment in December will allow you to claim the tax deduction for 2013. If you pay estimated state income taxes on a quarterly basis, you can also prepay your state taxes. As discussed below, you may not receive the full benefit of prepaying your state income tax and property taxes if you are subject to Alternative Minimum Tax.
Submit your January mortgage payment before the end of December, which will increase your 2013 mortgage interest deduction.
Be careful about prepaying your property and state taxes early if you could be subject to the dreaded Alternative Minimum Tax. Dual-income couples, who live in high-tax states and have children, are more susceptible to getting snagged by this tax. Consult your tax professional about this potential tax trap.
This will be easier to do if you are self-employed. Consider delaying your billing until late December or early January. If you expect to receive a bonus at year-end, see if you can postpone it until January. Deferring income only makes sense if you expect to be in the same or lower tax bracket in 2014.
Americans can only deduct medical expenses on their tax returns if their bills exceed 10% of their adjusted gross income (7.5% for Americans who are 65 years of age or older). If you are close to clearing that hurdle, consider paying medical expenses now. Prepay your January health insurance premium, make doctors’ appointments now rather than early in 2014, and buy medical supplies and prescription drugs that qualify for the deduction.
If you want to dump an investment loser, go ahead and sell it and pocket the capital loss. This loss can offset income that your overall portfolio has generated. You can use the capital loss to neutralize capital gains and up to $3,000 in ordinary income. If you can’t take advantage of the entire loss in one year, you can carry it forward to future years.
With the stock market at record highs, now may be a great time to donate stock or other securities with long-term capital gains directly to your favorite charity. If you sell a profitable investment and give the proceeds to a charity, you are subject to tax on the gain. If you transfer the investment to a charity instead, you avoid the tax and pocket a tax deduction based on the market value of the investment on the date of the donation. High-earning Americans with investment gains have an even greater incentive to be generous this year thanks to the American Taxpayer Relief Act of 2012 and the Patient Protection and Affordable Care Act (as amended by the Health Care and Education Reconciliation Act of 2010). Individual filers with taxable income over $400,000 and married filers with taxable income over $450,000 face a top marginal rate of 39.6% (previously 35%) and a top marginal tax rate on long-term capital gains of 20% (previously 15%). In addition, individual filers earning more than $200,000 and joint filers earning more than $250,000 face a Medicare “surtax” of 3.8% on net investment income and an Additional Medicare Tax of 0.9% on wages.
When you contribute to a charity by credit card, you will receive credit for the donation based on the date of the charge and not when you pay your bill. Consequently, you can donate via a credit card in December and capture the deduction in 2013, but pay the bill in January.
Retirees who must take yearly required minimum distributions from their Individual Retirement Accounts can donate up to $100,000 to a favorite charity in 2013 with their withdrawal. A donated distribution will not be treated as income for the taxpayer on their return if the required minimum distribution is made directly to the charity.