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‘Tis the Season … for tax planning

By Gail Kinsella


While it may seem as though you were filing tax returns just yesterday and packing away last year’s records, the time for tax planning for this year-end is now upon us. With a number of significant changes to the tax code resulting from 2013 legislation, tax planning is more important than ever.

For a number of years, the possibility of rising tax rates has been a point of discussion, and now that reality has come to pass. The top 39.6 percent income-tax bracket has been added along with a corresponding capital-gains rate of 20 percent for taxpayers in this bracket. Let us not forget the 3.8 percent surtax and 0.9 percent Medicare tax.

Simply looking at tax rates is not enough. In terms of tax-planning strategy, unless Congress acts to extend certain provisions, a number of tax breaks could be dropping into the sunset for years beyond 2013.

Among the tax breaks that may not be available next year are the option for state and local sales/use taxes instead of state and local income taxes; the above-the-line deduction for higher-education expenses; 50 percent bonus first-year depreciation as well as the $500,000 expensing limitation for Section 179 property and tax-free distributions by individuals 70 ½ or older from IRAs for charitable purposes.

While no one likes spending money before they absolutely must, there may be exceptions depending on a number of factors. Consider your marginal tax rate — the highest rate at which your last dollar of income will be taxed — in combination with potentially expiring tax benefits.

Tax planning is a complicated dynamic in which you should consider multiple years together. Common wisdom tells us that if you expect your tax rate may be lower next year, consider deferring income to next year and accelerating deductions into this year. Conversely, if you believe your tax rate will be higher next year, then the opposite approach makes sense.

The reintroduction of phase-outs for personal exemptions for higher-income taxpayers and certain itemized deductions adds to an already complicated situation. Timing is the name of the game in many situations. Whether it be “bunching” of itemized deductions, acceleration, or deferral of income to maximize the potential for limiting bracket shift, timing can be critical.

Tax-deductible expenditures must be made before year-end and can be accomplished with the use of a credit card. When planning year-end stock sales, be sure to consider carry-forward losses available to offset gains and the holding period for the stock. The last thing you want to do is find yourself making a decision that could have resulted in a more favorable outcome if only another day or two had passed. Holding periods are important for sales that result in both gains and losses as well as in situations involving gifts of appreciated stock to charities or loved ones.

Consider this: in 2013, the tax rate for long-term capital gains is still 0 percent for gains and dividends that fall within the 10 percent or 15 percent bracket. This makes one think immediately of gifting to children. But beware; gifts exceeding $14,000 (or $28,000 if splitting gifts with a spouse) will reduce your unified federal gift credit and estate-tax exemption. In addition, if your gift recipient is under 24, the ever-annoying “kiddie-tax” rules could apply.

Charitable contributions are always a topic for consideration. In certain cases, gifting appreciated securities instead of cash makes sense because you may be able to deduct the fair-market value of long-term, capital-gain property. Bottom line: avoiding the capital-gains tax is an important aspect of choosing your type of gift.

IRA conversion is still a popular topic. A conversion from a traditional IRA to a Roth does trigger income and you can’t ignore the marginal tax-rate implications. However, a conversion may make sense if you expect to be in the same or higher tax bracket during retirement.

The timing of health-care expenditures often bubbles up at this time of year. The IRS recently announced a new exception to the “use it or lose it” rule for flexible-spending accounts. The caution here is that there may be limitations and an employer must amend the plan to allow the carryover privilege and the grace-period option may not also be employed. Your best bet is to contact your plan administrator if they have not yet reached out to you.

For all of the changes and 2013 year-end concerns, some of the standby tax-planning items remain relevant. The alternative minimum tax (or AMT) is still a troublesome mess, and retirement plans need to be established before year-end in order for deductions to apply.

Businesses need to consider recently issued rules relating to expensing and capitalizing asset purchases, repairs, and maintenance. The rules take effect in January 2014 and will impact nearly all businesses.

What is one to do? Contact your CPA today and prepare now for what lies ahead.


Gail Kinsella is a partner in the accounting firm of Testone, Marshall & Discenza, LLP. Contact Kinsella at



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