Holiday season has only just begun, 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 to get ready for what’s ahead and possibly save money.
• Get organized. Start gathering receipts and other items for 2013 returns. Day-care receipts, health expenses and pay stubs are all supporting documents.
• Review the past. Look at 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 on a professional. The objective is to get an early idea of your tax liability so you can make proper adjustments.
• 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 in these next few months or allocating money next year to medical reimbursement or dependent care accounts require you to pay pre-tax 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.
• Be generous. Charitable donations can help you reduce taxes owed as long as you itemize your return. But be warned: A few $25 donations and a couple of Goodwill receipts are probably not going to help you much.
• Know the law and act accordingly. 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. For couples over $450,000 and individuals over $400,000, there’s a higher tax rate: 39.6 percent. Throw in the new 3.8 percent surtax on investments for high earners, and possibly another 0.9 percent change, and the total tax liability can go to 44.3 percent. Further, capital-gains and dividend taxes for high-income people can go to 20 percent.
The minimum for medical expense deductions for anyone under 65 increases from 7.5 percent to 10 percent of income, which means fewer people will qualify. In addition, the forgiveness debt on home foreclosures, sales tax deduction, private mortgage insurance deduction, teacher’s classroom supplies deduction, tuition and fees deduction, and residential energy tax credit are only good for 2013.
• Consider the power of three. Brodie said 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, you still have time to file an amended return.
• 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.
The Chicago Tribune contributed to this report.