This year is coming to an end, and smart investors are already looking forward to how they can make the most of new opportunities next year. In particular, if you take steps to minimize your taxes in 2014, it can make a huge difference in how much you eventually put aside for your own long-term financial planning.
To help you prepare for the coming year, here are five key numbers that will help you reduce your taxes and keep more of your hard-earned money for yourself.
The limit on how much you can contribute to an IRA next year will stay the same as it was in 2013, with the general limit letting everyone set aside up to $5,500, so long as you earned at least that much from work. That limit applies whether you contribute to a Roth IRA or a traditional IRA, although certain income restrictions can prevent high-income taxpayers from being allowed to contribute to a Roth IRA. Income also plays a factor in whether you can deduct the amount you contribute to a traditional IRA, as do other things like marital status and whether you or your spouse is eligible for a retirement plan at work. Those who are 50 or older are allowed to contribute an extra $1,000 to an IRA.
Similarly, 401(k) contribution limits will remain the same at $17,500, with those 50 or older getting the right to set aside an extra $5,500. As with IRAs, you're only allowed to contribute to a 401(k) to the extent that you actually earn income from the employer who offers it, so if you didn't earn that much, your maximum contribution will be less.
Social Security taxes only apply to wages and salaries up to a certain limit, which in 2014 will be $117,000. Up from $113,700 in 2013, the new figure means that employees will pay a maximum of $7,254 in Social Security taxes in 2014, with employers responsible for matching that amount up to the same limit. Self-employed individuals are responsible for both portions of the tax. Attentive taxpayers will notice that the 2.9% rise in the wage base doesn't match up with the 1.5% cost-of-living increase for Social Security benefits for 2014, as the two figures are derived from different sources.
The estate-tax exemption is now indexed to inflation, and in 2014, it will rise to $5,340,000, up $90,000 from 2013's figure. If the value of assets you own that will be included in your estate when you die is less than this amount, then you face a much simpler estate-planning situation than those with potentially larger estates.
Congress finally agreed to allow the exemption for the alternative minimum tax to rise with inflation, meaning that in 2014, the AMT exemption will rise to $82,100 for married filers. Single filers will get a $52,800 exemption. At these levels, the AMT only hits about 3.4 million taxpayers, as opposed to an estimated 30 million who would have had to pay AMT without the latest changes. For high-income earners who pay large amounts of non-AMT-deductible items, such as state and local taxes, the exemption is especially important to reduce or eliminate potential liability for the alternative minimum tax.
Know your numbers
If you want to cut your taxes, it's smart to keep all of these numbers in mind. By making maximum use of retirement accounts, staying aware of payroll taxes, sheltering your estate from death taxes, and incorporating potential AMT liability into your tax equation, you'll pay the IRS as little as possible and keep more money in your pocket.
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