Why Year End Tax Planning is Important and When to Start

Tax planning is something you should be doing throughout the year. However, if you have come to the final month of 2013 and find that you may not have done everything possible to organize your taxes and reduce your liability, the time to start is now. True, the holiday season is already very busy but it is in your financial best interest to take some time out to review your tax situation before time runs out.

This year, it is more important than ever to do some proactive year-end tax planning. 2013 brought about several changes in the tax code with many tax cuts and deductions expiring, as well as some new taxes being added.

To help navigate the complicated federal tax code, it is important to be aware of some of the major changes happening this year:

Top Marginal Rate Increased from 35% to 39.6%: With the expiration of the Bush-era tax cuts, the top marginal rate for the highest income earners has gone back to the 39.6% level. This will affect single filers earning $400,000 and up and married joint filers earning $450,000 and up. If you are close to crossing the threshold into the highest bracket, it may be to your benefit to reduce some of your year-end income and/or defer some until next year. By staying out of the top tax bracket, your marginal rate will drop from 39.6% to 35%.

Medicare Tax on Wages of .9%: To help fund the Affordable Care Act, a .9% Medicare tax has been added to the wages of single filers earning $200,000 or more and married joint filers earning $250,000 or more.

Medicare Surtax on Investment Income 3.8%: Another Medicare tax has been added on investment income to help fund the ACA. This one is 3.8% and is on the investment income only of single filers earning $200,000 or more and joint filers earning $250,000 or more.

Capital Gains Rate Increased to 20% for High Income Earners: Single filers earning $400,000 or more and married joint filers earning $450,000 or more will see their long term capital gains rates increased from 15% to 20%. For those under this income threshold, the rate stays at 15%.

Personal Exemptions Phased Out for High Income Earners: In 2013, the personal exemption phase out was added back into the tax code. Beginning at $250,000 for single filers and $300,000 for married joint filers, your personal exemptions begin being phased out. If your income reaches $372,500 for a single filer and $422,500 for married joint, the personal exemption is completely phased out.

There are several other changes to the tax code as of 2013, as well as other tax breaks (particularly for small businesses) that are expiring at the end of this year. Speak with your tax professional as soon as possible to ensure that you are taking proactive steps to take advantage of everything available to you and keep your 2013 tax burden as low as possible.

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