How To Not Suck… At Getting Ready For Tax Season

(photo: stevendepolo)

(photo: stevendepolo)

It might seem a bit early to bring up tax returns, but this is actually the perfect time to get the ball rolling before the holiday season takes over our lives and unpleasant things like thinking about taxes get pushed off into the new year.

Even though the government shutdown will result in a late start to tax-filing season this year, meaning you can’t file until Feb. 4 at the earliest, the April 15 filing deadline remains unchanged.

Another thing that wasn’t affected by shutdown is the calendar year. Yes, 2013 still ends on Dec. 31, and after that date, there’s not much you can do to impact your taxes.

Here’s what you need to know, and what you can still do, to save money on your tax bill.

TAX CHANGES
This is the depressing part.

For starters, there’s a good chance you’re in a higher tax bracket than you were in 2012. You can look up your bracket here.

Taxpayers had enjoyed a two-year break on Social Security taxes, but now, no matter what you earn, you’ll pay more.

Adieu to the lower 4.3% Social Security tax, and a grudging welcome back to the 6.2% rate.

High wage earners will feel the biggest bite, with those people chasing down “millionaire” status — marrieds who earn more than $450,000, heads of household who bring in more than $425,000 and singles who earn more than $400,000 — facing a top tax rate of 39.6%.

Those same folks are seeing higher rates — 20% up from 15% — on capital gains and qualified dividends.

Then there’s the Medicare surtax, which is 1.45% — unless you’re a high wage earner. You’ll pay an extra 0.9% Medicare surtax if you’re a single person or head of household who earns more than $200,000, or if you’re married filing jointly and earn more than $250,000.

Those same earners will also see a fat 3.8% percent Medicare tax on net investment income. This so-called “Obamacare surtax” or “health care surtax” is due on interest, dividends, rents, royalties, capital gains and annuities.

But wait, there’s more.

While the personal exemption rises to $3,900, there’s a new phase-out for high wage earners. Singles with adjusted gross incomes of $250,000, or marrieds with AGI of $300,000, will start to see the phase-out. It phases out completely at $372,500 for singles and $422,500 for marrieds.

Those same high earners will see new limits for itemized deductions for 2013.

TAX-LOWERING STRATEGIES
Though the countdown clock to Dec. 31 is ticking, you still have time to limit the damage these new rules will do to your overall tax bill.

1. Save more
You can save up to $17,500 in your 401(k) for 2013, and if you’re over age 50, you can save $23,000. If you haven’t started saving this year, it’s not too late. Ask your benefits administrator if you can accelerate your contributions so you can come close to the max — if you can afford it.

Every penny you save will lower your taxable income for the year because you’re saving pre-tax dollars — but you have to save it by December 31.

If you choose to save in a Roth 401(k), you won’t get the deduction today, but there are future tax benefits.

There’s more time to fund an IRA, but this will only help you on taxes if you can deduct your contributions. That deadline is the same as your tax filing day, April 15.

For the 2013 tax year, you can save $5,500 in an IRA, or $6,500 if you’re over age 50.

A tip for next year: start your 401(k) and IRA savings early in the year. That will allow you to contribute smaller amounts each week, and going on auto-pilot will give you one less thing to worry about.

2. Fix your hangnail
It’s a lot harder to accumulate enough medical expenses to reach 2013’s higher threshold. While you used to be able to deduct your medical costs once they exceeded 7.5% of your adjusted gross income, starting with your 2013 return, medical costs must exceed 10% of your adjusted gross income.

If you’re over age 65, you have a few more years before 10% becomes your number. You can still use the 7.5% number until Dec. 31, 2016.

Beginning Jan. 1, 2017, all taxpayers are in the 10% boat, no matter their age.

You still have a few months to see all your doctors, specialists and have that procedure you’ve been putting off. If you can bunch together your medical expenses, you’ll have an easier time hitting the 10% threshold.

3. Keep my check, please
If you think 2013 will be a tough tax year for you, but have enough cash on hand to make it through the end of the year, consider asking your employer or clients to withhold payments to you until after Dec. 31.

This will lower your taxable income for the year, but it also means you’ll have to find another way to pay your bills. And it comes with the huge caveat: If you kick the can down the road, you could wind up with a higher-than-expected taxable income for 2014.

4. Give it away
Increasing your charitable donations is another way to lower your tax burden for the year.

Donating appreciated stock is one option. You’ll get the charitable write-off, and you’ll also avoid paying the new, higher capital gains tax on the sale of the security.

Another option is to donate your Required Minimum Distributions (RMDs) from your retirement plans. If you use a “Qualified Charitable Distribution,” the RMD money you give to charity won’t be counted as your taxable income. But the IRS won’t let you have it both ways. You can’t claim a Qualified Charitable Distribution as a charitable donation.

5. Check your investments
If you’ve taken profits by selling winning stocks or mutual funds during the year, consider selling some losers, too, so you can offset the gains.

6. Check your credits, mom and dad
A batch of credits loved by families across the fruited plains were extended until 2017:
The Child Tax Credit
The Earned Income Tax Credit
The American Opportunity Tax Credit

And the Child and Dependent Care Tax Credit was made permanent.

7. Invest in a good CPA
It seems the tax code gets more complicated every year, and while you may try to keep up, consider enlisting the help of someone for whom the tax code is already a full-time job.

You can look for a certified public accountant through the American Institute of CPAs.

Have a topic you’d like to see covered in How To Not Suck? Or maybe you’re an expert who would like to share your insight with Consumerist readers? Send us a note at notsuck@consumerist.com.

You can read Karin Price Mueller’s stories for The Star-Ledger at NJ.com, follow her on Facebook, and on Twitter @kpmueller.

PREVIOUSLY ON HOW TO NOT SUCK:
How To Not Suck… At Picking A Retirement Plan
How To Not Suck… At Deciding When To DIY
How To Not Suck… At Getting Out Of Debt
How To Not Suck… At First Year College Budgets

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  1. drummerqueen7 says:

    Consumerist, I’ve been with you through thick and thin. And I love the concept of this feature. But I can’t stand that it’s called “How To Not Suck” – it’s very juvenile and awkward. Can you please come up with a better name for it?

    • SingleMaltGeek says:

      Not to invalidate your loathing of the name, but I really like it. It hints that you may not be great, but you can be competent at these things that may have previously made you bury your head under your pillow and suck your thumb. :)

      Maybe Consumerist should do a poll on how readers feel about the name. (But then, don’t get me started on survey design and how, if not done properly, it can completely invalidate the results. Because I will drone on and on about it.)