The clock is ticking. 2013 is almost over which means that year end tax strategies are on the minds of many taxpayers. By now, we all know the most common tips (pay mortgages and taxes in advance, make contributions to retirement accounts, donate to charities) but there has to be something else, right? It’s true that you can engage in life changing behaviors with a resulting tax savings. Whether those are worth it to you is another story. But here, for your last minute consideration, are thirteen dramatic – and potentially risky – year end tax strategies for 2013:
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- Move. A move across the border in some states can save you thousands of dollars in property taxes, income taxes, excise taxes and – let’s not forget – sales taxes. Seven states impose no income tax at the state level (Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming) and two states tax only interest and dividends (Tennessee and New Hampshire). Five states do not have general sales taxes (Alaska, Delaware, New Hampshire, Montana and Oregon). And you can fill up for a lot less in Alaska, Wyoming, New Jersey, South Carolina and Oklahoma than in most other states, as state taxes on fuel remain relatively low. Lighting up in most southern states will cost you a lot less in tobacco taxes than over the Mason-Dixon line. In terms of state and local tax burdens, your best bets for the lowest combined rates are (in order, as determined and reported by the Tax Foundation and MSN Money): Wyoming, South Dakota, Nevada, Alaska and Florida. Of course, lower tax rates don’t always translate into a better quality of life. While it’s true that some low tax states have great things to offer, others may suffer from high rates of infant mortality and low high school graduation rates. Also? Not always garden spots and often, a bunch of cringe-worthy sports teams (sorry, Dolphins fans but losing to the Jets?).
- Play the odds. To be honest, I never win anything. Ever. Cards, pick ‘em tourneys and definitely not the lottery. I’m bad at all of it. Okay, I did win at slots once but my self-imposed $10 limit tends to necessarily mean that even my total winnings are pretty meager. If, however, you play the odds, don’t just keep track of your winnings. Remember to report what you lose, too, since at tax time, being a loser can be a good thing. You can deduct your losses on a Schedule A as an itemized deduction to the extent of your winnings. Don’t go too crazy at the casino, though: you cannot deduct more in losses than you report in winnings. And must be able to document your losses by type of loss, date, name and location of the gambling establishment and amount.
- Have an operation. When you’re adding up those medical expenses, you probably already know to include your run of the mill expenses like prescriptions, doctor’s visits and health insurance premiums. But don’t forget that other expenses – like that operation you’ve been putting off – would be deductible as well. In terms of timing, the deduction is available in the tax year in which the bill was paid, not when services were rendered. The surgery doesn’t have to be for a life threatening condition to be considered medically necessary; this includes anything from cataract removal to treatment for gender identity disorder. Surgeries and expenses related to treatment in foreign countries may also be deductible, not that I’m necessarily recommending it. And this year, the more expenses the better: as part of Obamacare, the threshold for claiming medical expenses jumped up to 10% of your adjusted gross income (AGI) – as opposed to 7.5% of your AGI for 2012 – which means that fewer taxpayers will be able to meet the criteria for claiming the medical expense deduction. That doesn’t mean you should overdo it and remember that elective surgery for purely cosmetic purposes isn’t tax deductible (you could end up looking like that creepy cat lady – Google it).
- Start a business. With unemployment rates still relatively high, many taxpayers are searching for ways to create more income. Starting your own business requires some thoughtfulness: it can be rewarding (and sooooo job creating) but it can also be financially draining. Assuming you know what you’re getting into and accepting that half of all small businesses fail in the first two years, starting a business can result in tax benefits. It may be easier to start small. Really small. As in turning your existing hobby into a business. If you earn income in the pursuit of a hobby, it’s taxable. While you can offset the income with deductions, you cannot claim deductions that exceed your income – there’s no loss for a hobby. You can, however, claim business losses in excess of your business income. It’s still lost income so don’t get too excited but at least it’s deductible.
- Go to graduate school. Maybe starting a business isn’t your thing. If you’re still searching for a way to up your employment potential, consider graduate school. If you go to school in order to improve your job skills in the same vocation, you might be able to claim the related costs as business expenses. If you’re simply going to school to get an additional degree, brace yourself for the cost: the annual costs associated with secondary education are staggering. Most students take out loans to cover the costs. Plus side: student loan interest is generally deductible (just the interest, not the principal) on your tax return as an above the line deduction – this means that you don’t have to itemize in order to claim the deduction. Negative side: you may be paying back those loans for the rest of your life. You may also hate it – which is why one attorney is offering you money to go anywhere but law school.
- Buy a yacht. Or better yet, buy your tax attorney a yacht. In January, as part of the fiscal cliff deal, the option to deduct state and local sales taxes in place of state and local income taxes was extended for a year, but only a year. That means, for 2013, taxpayers who paid out big sales tax dollars compared to state and local income tax dollars (particularly affecting those taxpayers in states where there are no state and local income taxes) would get a tax advantage. Congress didn’t renew the sales tax deduction for 2014, so if you’re planning to buy big, buy now.
- Walk away from your underwater home. Homeowners in the U.S. were underwater by a startling $805 billion as of the end of third quarter of 2013. For those homeowners that renegotiated their mortgages, faced a short sale or suffered a foreclosure, the potential tax consequence as a result of forgiven debt was mitigated when Congress passed the Mortgage Forgiveness Debt Relief Act in 2007. The Act offered an exception to the debt as taxable income rule for qualifying homeowners and was intended to be a temporary fix. But temporary became not so temporary as the Act was extended over and over. Now, with the deadline for the exception looming at year end, Congress hasn’t acted. If Congress remains silent, it could become a lot more expensive to be underwater in 2014.
- Get married. I’m sure my husband can tell you all of the reasons why getting married totally isn’t worth it… And from a tax perspective, he may be right since both we both work (the so-called marriage penalty tends to hit couples hardest when both spouses work). But that’s not true for everyone. In some cases, it is tax advantageous to get married. And now, there are fewer obstacles than ever to getting married: the Supreme Court has decided that states – not the feds – can regulate same sex marriages and the IRS has ruled that all legal same sex marriages will be recognized for federal tax purposes. So, gay married isn’t gay married anymore, it’s just married. And all married folks are treated the same. And since marital status for federal tax purposes is determined as of December 31, it doesn’t matter what you’ve done all year long: today is the only day that matters.
- Buy a cow. You’ve heard the whispers about the so-called “dairy cliff” and threats of $7/gallon milk. Congress has yet to settle on a farm bill which means that milk prices could be on the rise. This is because of a provision that would cause farm policy to revert back to a mandate forcing the government to pay more to dairy producers – a problem that we haven’t grappled with for decades. Higher prices for the government mean higher prices in the cart. It would seem a no-brainer to just fix the bill, right? Here’s the problem: the farm bill is tied to food stamps. Congress can’t seem to agree on what to do with those which means that while they fight, the cost of your milkshake is slowly creeping up.
- Sign up for health insurance. Or move to Canada. Beginning in 2014, individuals are required to have health insurance. If you don’t have at least “minimum coverage” for your health insurance in place – and don’t otherwise meet an exemption – you will face a penalty on your income tax return. Don’t forget that we’re not calling it a penalty. Or a tax. Those have a bad connotation. We’re calling it your “individual shared responsibility payment.” It works out to 1% of your yearly household income or $95 per person for the year, whichever is higher. Some exemptions and exceptions apply.
- Finish that honey-do list. For the last several years, there have been energy credits available for environmentally-friendly improvements such as insulation, windows, doors, roofs, water heaters and heating and air conditioning systems. Those credits will expire after 2013. To claim the credit – of up to $500 – you have to install qualifying items before year end. All is not lost: I’m fairly certain that you can find a Lowe’s or Home Depot open today. Don’t forget to check those labels.
- Figure out what you want to do with your life. But do it quickly. If you pay qualified education expenses in 2013, you can claim the tuition and fees deduction on your federal income tax return. It’s an “above the line” deduction which means that you can claim the deduction even if you don’t itemize. The deduction is worth up to $4,000 so long as your modified adjusted gross income (MAGI) is not more than $80,000 ($160,000 if filing a joint return). And unlike some of the educational credits, you don’t have to be enrolled in a formal degree program to qualify. All good stuff, right? Of course. Which is why Congress is letting it expire at the end of the day. But if you pay next semester’s tuition today, you can still take advantage of the deduction.
- Have a baby. Statistically, just a few of you are going to be able to pull this off: only so many babies are going to be born today. If you manage to be one of those parents, you’ll be able to claim a personal exemption for your child (and maybe some other child-related breaks) for 2013. But if you wait until 2014, that’s okay, too: the personal exemption (and other tax items) will increase a bit next year. Be beware: babies are mostly cute but they’re also expensive. And stinky. Whether you agree that it’s good tax policy or not, there are significant tax breaks associated with having children including exemptions and the earned income tax credit. But don’t be fooled: those tax breaks don’t actually offset the real costs of having kids. Despite that, I liked them enough to have three of them (quick disclaimer: as they get older, they get less stinky but not less expensive).
So there you have it. Thirteen dramatic year end strategies for you to consider in 2013 based purely on tax outcomes.
Of course, I’m not saying you should do all of them. Or any of them. I don’t know what your personal circumstances are exactly – and those details matter. You shouldn’t plan your major life (or death) events around the potential tax consequences. But you should consider how you can take advantage of tax breaks which might be available to you – there’s nothing that says you should pay more in taxes than you have to. If you’re thinking about whether something makes sense, run the numbers and talk to your tax professional. And remember, from a tax perspective, timing is everything.
Happy New Year!
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