One of the biggest problems with all of the changes that were made in 2013 is that most will actually affect taxpayers next year, when it’s too late to cushion themselves from the damage that they can do. While it’s true that some of the changes that came out this year, including the expiration of the payroll tax cut, were the cause of any immediate financial blow, these can’t be avoided. That being said, there are some moves that taxpayers should be making now to minimize the damage that some of the changes are going to make, especially with the new tax bracket and new increase in investment income taxes.
With that in mind we put together a blog with advice and information about several actions that consumers should be taking now to reduce the financial damage that the latest 2013 tax increases could make in the future. Enjoy.
Home Repairs – One of the most viable actions that you can take to reduce the new tax impact on your income is to make home repairs. 2013 has seen a 3.8% Medicare surtax introduced that applies to rental income as well as real estate. This includes any gains that are made from selling a primary residence and is aimed at individuals who make over $200,000 a year as well as married couples who are earning over $250,000 a year.
If you own rental property you may be able to offset quite a bit of these taxes by having repairs done to your property or properties, such as putting in new appliances, fixing and patching leaks and other home improvements that don’t necessarily add to the property’s value. The reason this works is that, while improvements must be deducted over several years, repairs are immediately tax-deductible. If you are a landlord don’t forget that you can also deduct other expenses related to your rental properties like utilities, insurance premiums and even advertising.
A person that chooses to sell their primary home won’t the forced to pay the Medicare surtax on all of their capital gains but instead will see the 3.8% tax applied only to the gains that they made above $250,000 or $500,000, depending on if they are filing individually or are a married couple and will be filing jointly.
For example, if a couple is selling their $600,000 home and it was purchased for $400,000 they would pay 3.8% only on the $100,000 that they made above the $500,000 exclusion. If an individual was selling the same home they would pay 3.8% of the $350,000 that they earned above the $250,000 individual exclusion. In that case the couple would pay $3,800 in taxes (3.8% of $100,000) and the individual would pay 13,300 in taxes (3.8% of $350,000).
Deferring Compensation – If an individual is worried that their bonus check is going to be decimated by the new taxes they may well wish to defer compensation on their bonus, or even another part of their compensation, to a future year. This move is mainly meant for those individuals who happen to be sitting on the cusp of going into a new, higher tax bracket or close to being hit with other tax hikes. It is suggested that anyone who puts off compensation should spread that income out over a period of about 5 to 10 years.
For example, while $300,000 of deferred pay that was taken all in the same year would definitely come with a large tax bill, someone who took their deferred compensation in payments of $100,000 spread over three years may very well avoid hitting the newest tax bracket and dodging a huge tax hit.
Holding more individual stocks and bonds. - If you own mutual funds you realize that their managers are legally obliged to pass on any gains to their investors at the end of every fiscal year. What this means is that some fund investors, even if they haven’t sold any of their shares, may well find themselves having to pay capital gains taxes. Indeed, now that the stock market has scaled back their pre-crisis levels, analysts are predicting that payouts for mutual funds are going to be more common.
Although investors don’t have control of the funds gains or losses, a portfolio built out of individual stocks and bonds will give the investor the flexibility to time some of their losses so that they can also offset some of their stock gains. Kurt Overway, the president of Managed Portfolio Advisors, recommends using separately managed accounts in order to replicate a broad market index but using individual stocks to do it. This way he says the investor will have the ability to sell individual losers one by one and use those losses to offset their taxable gains. Mr. Overway cautions however that people don’t let their concerns about tax changes cause them to take on holdings that are too much for their risk tolerance or don’t match their goals.
At the end of the day, unless you’re a CPA, you’ll definitely want to be seeking out professional advice on how to guard your assets so as to pay the least amount of taxes possible. We hope that this blog has given you a little bit of insight and possibly some good questions to ask your accountant next time you get together. See you back here soon.