- Maximize retirement plan contributions. For 2013, you can put $17,500 in a 401(k) plan, $12,000 in a SIMPLE, or $5,500 in an IRA. If you're 50 or older, you can set aside even more as "catch-up" contributions.
- Decide whether to sell investments to offset gains or losses already taken this year. You can deduct $3,000 of net losses against ordinary income.
- Estimate your tax liability for 2013, taking the new Medicare tax increases for higher-income taxpayers into account. If you'll be underpaid, adjust your final quarterly tax payment or your December withholding.
- December 31 is the deadline for taking a 2013 required minimum distribution from your traditional IRA if you're 70½ or older. Miss this requirement and a 50% penalty could apply.
- Purchase needed business equipment to use the first-year $500,000 expensing option for new and used equipment and 50% bonus depreciation for new equipment.
- Make energy-saving home improvements that could qualify for a lifetime tax credit of up to $500.
- Finalize annual gifts to use the 2013 exclusion from gift tax on gifts of up to $14,000 per recipient.
There's not much time left for you to make beneficial tax moves for 2013. Consider these possibilities.
You’ve worked hard to accumulate and protect your wealth this year. Now might be the time to consider tax-savvy ways to give some of it away.
To begin with, you might consider using the annual gift tax exclusion to give money to your family and friends in a tax-favored manner. Up to $14,000 can be given to any number of individuals per year without tapping into your lifetime federal estate tax exemption. The current lifetime exemption is a lofty $5,250,000, but making $14,000 gifts each year could help lower your taxes if your estate is eventually valued above the exemption amount.
Another way to provide for your family is investing in a student’s 529 college savings plan. Such contributions can provide for tax-free appreciation and withdrawals when used for qualified college expenses.
If it’s a federal income tax deduction you’re after, however, your gifts will need to go to a qualified charity instead. Consider donating appreciated stocks or mutual fund shares owned for more than a year instead of donating cash. You will save on capital gains tax (which will be higher for many taxpayers in 2013) and receive a deduction equal to the market value of the security on the date of transfer.
Gifts of other types of assets, such as real estate, jewelry, and artwork, can also score a deduction this year. Be aware that if the gift is valued over $5,000, a qualified appraisal will be required. And no matter the type of gift, if its value is $250 or more, a tax receipt from the charity is required before you can write it off.
Giving away your resources in a thoughtful and tax-smart way can be as difficult as accumulating them in the first place. For help in making these important and sensitive decisions, contact our office.
The dividing line between a business and a hobby may be thin, but it can look like a canyon when you are on one side and your tax deductions are on the other. The gap is a function of differing treatment of expenses. For example, when you incur ordinary and necessary expenses in the operation of your business, those costs reduce the taxable income of the business. In addition, business losses can generally be used to offset income from other sources, such as wages.
When your activity is considered a hobby, expenses can only be claimed to the extent of income from the activity, and are generally deductible as a miscellaneous itemized deduction on your personal return.
Here are nine ways to help convince the IRS that you have a business rather than a hobby.
Form 1099-K is a new information return sent to businesses by "payment settlement entities" reporting the amount of credit card and other electronic receipts that were processed for the business. The IRS also receives a copy of Form 1099-K and cross checks the reported amounts with the business's total income reported on its tax return. Where the numbers don't seem to make sense, the IRS sends notices to businesses telling them they "may have underreported gross receipts." Notices go on to say "This is based on your tax return and Form(s) 1099-K, Payment/Merchant Cards and Third Party Network Transactions that show an unusually high portion of receipts from card payments."
The IRS has sent thousands of letters labeled "Notification of Possible Income Underreporting" to small business owners. The notification project is ongoing as part of the IRS's campaign to deal with the "tax gap," the difference between taxes owed and taxes actually collected.
If you receive a notice, contact us immediately so that we can determine what response is required.
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