Earlier this week I wrote about eight tax breaks that expire in 2013 and outlined a few things folks can do before these provisions end. But it's also a time to make a few moves that could help you pay less in combined taxes for this year -- and the next.
When it comes to year-end income tax planning, there are several questions to ask. Can you claim itemized deductions? Will you be in a higher tax bracket this year or next? Should deductions and credits be claimed in 2013 or 2014?
If you will be in a lower tax bracket next year, then it makes sense to claim as many deductions as possible in 2013. To get a better picture of how to proceed, you should prepare a projection of your income and deductions in 2013 and 2014. An experienced tax professional can do this for you, or you can use tax preparation software such as TurboTax.
In the meantime, here are a few year-end tax saving strategies to consider.
Pay taxes before year-end. If you itemize deductions, then consider paying your real estate taxes due in the next several months before the end of the year. Also make sure you've fully paid your state income tax. These taxes are eligible to be claimed on Schedule A as itemized deductions.
Donate shares to charity. With the the stock market at record highs, now is a good time to think about those charitable donations you have been planning to make. But don't take out your checkbook just yet! If you own shares of mutual funds or stocks that have unrealized gains, then consider donating shares to charity, instead of donating cash. The reason is that you'll deduct the market value of the donated shares, while neither you nor the charity will have to report the gains. So if you donate shares that you bought for $2,500 and that are now worth $4,000, you can claim a charitable donation for $4,000. One catch: The shares you donate must have been owned for more than a year.
Other charitable donations. You can also can clean out your closets and collect the old clothes, sporting goods, books and other household goods that you no longer use and donate those to charity. Just be sure to document these donations by making a list of the items when you donate them.
Donations made by credit card are deductible in the year they are charged, not the year they are paid. That means you can donate to your favorite charity by December 31 and claim a deduction in 2013 even if you pay the credit card bill next year.
Top off Your 401(k) and retirement plans. Some employers will allow you to catch up on contributions by increasing your deduction on your last paychecks of the year. If you are 50 or over, don't forget that for 2013 you can make an additional $5,500 "catch-up" contribution in addition to the regular 401(k) or 403(b) limit of $17,500.
Check Your Flexible Spending Account. These accounts allow you to set aside a portion of your pre-tax salary for certain purposes, such as child care or health care expenses. Under new IRS rules, people are allowed to carry over $500 in unused amounts for next year's expenses. Your employer may also offer the existing plan option to use unused amounts for up to two and half months following year-end.
Bunch your medical bills. Medical expenses are only deductible when they exceed 10 percent of your adjusted gross income (7.5 percent if you are over 65). If your income is low this year or your medical expenses are high, then it may make sense to pay any outstanding medical bills before year-end, stock up on prescriptions, get new glasses and pay your health insurance premiums before the end of the year.
Gather receipts for miscellaneous expenses. You can deduct union dues, legal and professional fees relating to tax and investment advice, and unreimbursed employee business expenses of mileage, equipment, education and supplies, among other things. If you pay a lot of expenses for your job or your investments, gather the receipts and cancelled checks so you can save more money when you file your 2013 taxes.