Here we are into month five of 2013, and many folks out there have no idea how this year is any different than 2012. The bad news is that this tax year is much different than years past. Provisions put into place by The American Tax Payer Relief Act of 2012 will impact the taxable bottom line of almost all taxpayers. You can read a bit more about the act from my blog post from earlier this year.
Now that the 2012 tax season is over, I am fully engulfed in tax planning meetings for 2013. That may sound odd coming from a financial planner and not a CPA. But, the fact of the matter is tax planning has always been important, will always be important, but is extremely important this year.
I know I must sound like a broken record to my clients when I tell them the three areas to focus on are the three areas we can control: how much we spend, how much we save, and how much we pay in taxes. Tax inefficiency can be one the largest culprits to derail financial success. It’s a silent killer because for two reasons: 1. Most folks have no idea about their tax liability until it’s too late, and 2.Most folks don’t realize the options they have to control their tax liability. This is why tax planning is so important!
What to do?
With many of the new tax increases tied to income (many have different definitions of income…AGI, MAGI, earned income…etc) it’s important to reduce income for 2013. This doesn’t mean you should work fewer hours or take a pay cut. It simply means we should plan to utilize provisions inside the tax code to reduce our taxable income by making allowable retirement contributions, accelerating business expenses, implementing Section 105 Health Reimbursement plans, and other tools the code allows.
Simply contributing more towards retirement may reduce taxes more in 2013 than in years past. New taxes, such as the New Additional Hospital Insurance Tax (Medicare Tax) and the Unearned Income Medicare Contribution Tax, can easily mean the difference between a refund or writing a check this year. And, sadly enough, most people won’t even have a clue where this additional tax came from or why their normal refund turned into stroking a check to Uncle Sam?
The answer lies in planning. It’s important to properly plan for 2013. With all the new twists and turns to the tax code this year, getting it right will be paramount to success. If you are one of those who simply bundles up your tax documents and dumps them on your tax preparer’s desk in the spring, be prepared…..things could be different because 2013 is different.