(CBS Local) — Managing a tax burden has never been more difficult, whether you’re managing your individual tax rates, the rates on your investments, the taxes on your privately held or pass-through business, or the income of executives and shareholders at your company. Lawmakers have been aggressively using the tax code to try to get the economy back on track, and there are now more ways than ever to reduce your tax liability – however, all of them take planning.
Defer income and accelerate deductions
Deferring income tax is a basic item of tax planning. As a general rule, you want to accelerate deductions into the current year and defer income into next year. There are many income items and expenses you can control, and self-employed taxpayers often have the best opportunities to legally shift income and expenses. Think about deferring bonuses, consulting income or self-employment income. Speaking of deductions — you can accelerate state/local income taxes, real estate taxes, and interest expenses.
Group Together Your Itemized Deductions
Many itemized expenses can be deducted only if they exceed a certain percentage of your adjusted gross income (AGI). By combining itemized deductible expenses into one year you can help exceed these AGI floors. Think about scheduling your non-urgent medical procedures all in one year to clear the 7.5 percent AGI floor for miscellaneous expenses, combine pass-through business’s professional fees such as tax planning and legal advice, in addition to any unreimbursed business expenses.
Try To Maximize Your ‘Above-The-Line’ Write-Offs
Above-the-line deductions are valuable because they reduce your adjusted gross income, and AGI is used to test whether you’re eligible for several tax benefits. The most common above-the-line deductions are traditional Individual Retirement Account (IRA) and Health Savings Account (HSA) contributions, moving expenses, self-employed health insurance costs, alimony payments and bank penalties you may have had to pay for early account withdrawals.
Better to give than to receive?
Seriously think about giving away appreciated property (like stock shares) to charity so you can deduct the full value without paying capital gains taxes. But avoid donating depreciated property; sell it first and give the proceeds to charity. In this way, you can claim any capital loss and take a charitable deduction at the same time. If you’re age 70 1/2 or older, think about making some charitable donations directly from any traditional IRA funds so that the gift/distribution will not be included in your income. Be sure to double-check limits before making any charitable contributions.
Maximize retirement account tax savings
Be sure to maximize your contributions to a retirement account. Traditional retirement accounts like 401(k)s and IRAs offer some of the best tax savings available. Your contributions reduce taxable income at the time you make them, and you don’t pay taxes until you take the money out. The contribution limits are $16,500 for a 401(k) and $5,000 for an IRA (not including catch-up contributions for those 50 and older). Tax tip: 2012 contributions to your IRA can be made as late as April 15, 2013.
Roll over into a Roth account
‘Roth’ versions of traditional retirement accounts, such as 401(k)s and IRAs, also provide a great tax savings opportunity. Although you don’t get a tax break when you put money into a Roth account, the money grows tax-free and is never taxed again. Rolling over your IRA into a Roth account now may make sense, since tax rates are low, and the value of many accounts has been artificially depressed. Paying tax on the rollover now could save money if tax rates go up and your account recovers. The AGI limit of $100,000 on these rollovers was recently lifted, so even high-income taxpayers can convert their IRA’s, but pay the tax now.
Invest in business equipment
Business owners have a chance to save on taxes while investing in their businesses. Legislation has doubled the bonus depreciation tax benefit for business property placed in service before the end of the year. You can fully deduct the cost of eligible equipment on your 2012 return if you placed the equipment in service by Dec. 31 of last year. To qualify, the property placed in service must be new and generally have a useful life of 20 years or less.
Self employed? Think about your salary
If you own your own corporation and work in the business, think carefully about your salary structure. Your tax treatment will vary considerably depending on whether your business is a traditional C corporation or an S corporation (in which corporation income Is “passed through” and taxed at the individual level). Distributions of corporate income are generally not subject to Social Security taxes. So if your business is an S corp, you will pay Social Security taxes only on your salary, not on any income you received as a distribution. C corporation distributions may also escape Social Security taxes, but are subject to a 15 percent dividend tax rate. So many C corporation owners will pay less overall tax on income received as salary (which is deducible to the corporation), while S corporation owners may do better if more income is received as dividends. Be careful; IRS is cracking down on misclassification of payments to shareholder-employees who claim too little salary.
Always monitor your withholding
Check your withholding and estimated tax payments now while you have time to fix a problem. If you’re in danger of an underpayment penalty, try to make up the shortfall through increased withholding on your salary or bonuses by claiming fewer withholding allowances. A bigger estimated tax payment can still leave you exposed to penalties for previous quarters, while withholding is considered to have been paid at an even rate throughout the year. To avoid penalties, pay estimated taxes equal to 110 Percent of your estimated tax liability.
Look over your tax situation during the year
The end of the year is always a good time to check your current financial situation and plan for yourself and your family. Think about cash flow, health care, retirement, investment and estate planning. Update your will, powers of attorney and health care choices for any changes that may have occurred during the year. Use the open enrollment period to make changes to employer-sponsored programs that could reduce next year’s taxable income. HAS’s and flexible spending accounts for dependent care/ medical expenses allow you to use pre-tax dollars to save on your taxes.
(About the author: Barry R. Steiner is a Chicago-based CPA and former IRS Agent. He’s the author of the best-selling income tax guide “Pay Less Tax Legally.”)