There's a pretty hefty lineage if you take the time to research the origins of the phrase "the early bird gets the worm," with many branches traced to the hardscrabble foundation of America's Industrial Revolution. Revolution or not, it comes down to the benefits of hard work over laziness.
The suitably fed early bird in our little story here is the well-prepared, and thus calm, taxpayer (yes, there is such a thing). These "early birds" do not consider the arrival of W-2 forms early next year the kickoff to their 2013 tax preparation season.
If you're smart, you already are in tax preparation mode, or will be after reading this.
You don't want to be left without a worm, right? Kind of a bummer, at least if you're a bird.
One quick note before we deep dive into tax morass: It is always advisable to consult your tax professional before making any alterations to your tax profile. You're more likely to have some quality time bending this person's ear at this time of year as well. Just another benefit of early tax-preparation efforts.
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Politics plays a part
Surprisingly, politics plays a role in year-end tax planning strategies -- this year more so than most.
The recent government shutdown forced the IRS to announce a delay to the 2014 tax filing season of up to two weeks. The upshot is that tax refunds could be delayed, while the end of the filing season stays put at April 15.
Recent laws with tax implications include the American Taxpayer Relief Act of 2012 (ATRA, signed into law in January), the Patient Protection and Affordable Care Act of 2010 (with provisions taking effect in 2013 and 2014), recent rulings on same-sex marriage, and additional tax reform likely in 2014, which will require some blind forecasting.
Boiled down, these mean income tax rates remain unchanged for all but higher-income taxpayers. ATRA sets the maximum income tax rate at 39.6%, while the Affordable Care Act's new surtax on net investment income and additional Medicare tax both kicked in as of Jan. 1 this year.
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Federal income tax rates for long-term capital gains and dividends for this year also remain the same for most folks: either 0% or 15%. However, higher-income earners take another hit here, as ATRA raised the maximum rate to 20% for singles with taxable income more than $400,000, married joint-filing couples with income more than $450,000, and a head of household earning more than $425,000. In 2014, those thresholds increase to $406,750, $457,600, and $432,200, respectively.
Taxpayers may want to consider using carry-forward losses from 2012 by recognizing capital gains to the extent they are available, because those are taxed at the ordinary-income rates.
This year more than most, year-end planning should look to avoid spikes in income, whether capital gains or other income, that could break through either the 39.6% bracket or 20% capital gains bracket.
And one helpful suggestion for those lucky enough to be in the "high earner" category: While your income may be too high to take advantage of lower rates, you probably have loved ones who can benefit. You can always give them appreciated stock, dividend-paying stocks, or mutual fund shares. Done the right way, and with the assistance of your tax advisor, these can be very tax-smart ideas.
The joy of prepayments
If possible, making payments this year that you would normally make early next year, including state and local income tax, property taxes, charitable donations, and deductible expenses (for those who itemize deductions), can help increase your 2013 write-offs and, consequently, lower your tax bill.
Other items to consider for year-end prepayment with possible tax benefits include college tuition bills, planned medical expenses and expenditures like job-hunting and investment fees, and payments for tax preparation and advice.
One caveat to this strategy is owing the alternative minimum tax, or AMT, for this year. If you know that to be the case, prepayment of state and local income and property taxes will backfire, as write-offs for those items are disallowed under AMT rules, as are miscellaneous itemized deductions.
(More from Manilla.com: 10 Things to Do Now to Prepare for Next Tax Season)
We'll end our fun tax chat here on a high note, especially if you like the idea of retail therapy.
You can deduct sales taxes on a major purchase, such as a motor vehicle, home, or large-scale renovation to your home, so if you've been thinking about pulling the trigger on a big-ticket item, do so before the year's end.
Of course, such write-offs will only be realized for those who itemize, and some benefits could be lost if you're hit with the AMT.
In all, a lot of things done now could put a smile on your face come tax time.
Here are some lifecycle changes to factor into both year-end tax strategies and future tax planning:
- Change in filing status: marriage, divorce, death or head of household changes
- Birth of a child
- Child no longer qualifies for child credit
- Child no longer qualifies for "kiddie" tax
- Casualty losses
- Changes in medical expenses
- College or other tuition expenses
- Employment changes
- Personal bankruptcy
- Business success or failure
Jim Staats is a technical support analyst at Manilla.com, the leading, free, and secure service that helps consumers simplify and organize all of their bills and household accounts in one place online or via the 4-plus-star customer-rated mobile apps. He has a bachelor's degree in industrial technology from California Polytechnic State University at San Luis Obispo. Wedged between stints supporting products at firms including Intuit and Sybase, Jim worked as a journalist reporting on real estate, business, technology, and other issues for print and online publications.
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