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Originally published February 22, 2014 at 8:13 PM | Page modified February 23, 2014 at 9:57 AM

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Tips for financial fitness, now and later

Tips for getting personal finances in shape for long-term tax efficiency.


The New York Times

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Tax lawyer Barbara Weltman says some people whose “income looks good on paper are cash-short and will feel socked” when they learn what they owe for 2013.

Weltman, the author of “J.K. Lasser’s 1,001 Deductions and Tax Breaks 2014,” is among the experts who cited both opportunities and traps for the current filing season and offered some tips for getting personal finances in shape for long-term tax efficiency.

Home office

The Small Business Administration says 52 percent of businesses are home-based. But according to Weltman, many people who qualify fail to take a home-office deduction.

In the past, that may have been because the paperwork was too daunting. Now, for 2013 returns, there is an easy alternative: simply deduct $5 a square foot for a home office, up to a maximum $1,500.

To qualify, a home office must be necessary for a business and must be used regularly and exclusively for it. But the office does not need to be a separate room or even partitioned off, Weltman said, so long as it is a clearly defined space. There must be enough income to offset the deduction.

Medical deduction

Previously, taxpayers who itemized deductions and had high, unreimbursed medical and dental costs could deduct them if they exceeded 7.5 percent of adjusted gross income. But last year, the threshold was raised to 10 percent for people under age 65. Beginning in 2017, the 10 percent threshold will apply to all taxpayers.

Altogether, 55 tax breaks that Congress had long renewed annually expired at the end of 2013, Weltman said, but some may be renewed and made retroactive.

She advised people over age 70½ who want to make charitable contributions directly from an IRA, for example, as well as business owners who want to take a big, upfront write-off for buying equipment, to first check whether Congress has renewed those provisions retroactively.

One expired provision that Julian Block, a tax lawyer, is confident will be renewed that way is the option to deduct state and local sales taxes instead of income taxes on federal returns — something that affects taxpayers in Washington.

Larry Krause, president of Tessara Financial Advisors, an independent wealth-advisory firm in Larkspur, Calif., notes that many investors hate to sell any holding at a loss, hoping it will bounce back in price. But capital losses offset capital gains dollar-for-dollar, so if you are going to recognize a gain, look for an offsetting loss to sell, he said.

If you like the investment, you can replace it after 31 days or look for a similar holding now. Many people held gold as a hedge last year, Krause said, but it lost value; when they took gains on stocks, he advised them to sell gold as the offset.

Krause is enthusiastic about qualified tuition programs, often called Section 529 plans. These are operated by states or educational institutions and offer a wide range of investments.

The account owners — typically parents, grandparents or other relatives — retain control over the money. The beneficiary is the prospective student, and, what’s more, the beneficiary can be changed.

The money put into the account is not deductible at the federal level, but some states, including New York and Virginia, offer tax breaks, and the account’s growth is tax-deferred. Money used for qualified education expenses is exempt from federal taxes.

If money is withdrawn for unapproved reasons, the owner will owe taxes and a penalty, but the money earned in the account may offset those costs.

Underwater uncertainty

Many people owe more money on their home than it is now worth and would like to have their mortgages reduced. But a tax problem could loom, Block said.

Normally, when a legal debt is forgiven, the amount is deemed taxable income. A special provision from last year, under which qualified homebuyers were exempted from that tax obligation, has expired. As a result, anyone seeking to renegotiate a mortgage this year should check into possible tax consequences.

Strategies for giving

If you’d like to give money to someone, there are no tax consequences for individual gifts of up to $14,000 a recipient or up to $28,000 if members of a couple give individually to a recipient, because each spouse is counted separately.

For higher amounts, it’s necessary to file a gift-tax return on Form 709, but no gift tax is owed until the total exceeds the lifetime credit of $5.25 million, according to Block.

How the rich are hit

Who qualifies as rich? The answers vary, but provisions of two laws that came into effect for 2013 returns will certainly raise taxes for people at the top of the income distribution.

For more than 95 percent of filers, the American Taxpayer Relief Act, passed on New Year’s Day 2013, made permanent the Bush-era tax cuts, which had been scheduled to expire. But the relief act raised the rate for the upper echelon.

And that group also faces two increases on their 2013 returns from the Affordable Care Act, which was passed in 2010.

The American Taxpayer Relief Act sets a top federal income tax bracket of 39.6 percent for single filers with taxable income above $400,000 and for couples filing jointly with taxable income above $450,000. The act also raises their rate on qualifying dividends and long-term capital gains to 20 percent from 15 percent.

In addition, the act limits itemized deductions, which will be cut for joint filers with adjusted gross income above $300,000 and for single filers above $250,000.

The cut will be the smaller of 3 percent of all itemized deductions or 80 percent of certain itemized deductions — those for medical and dental expenses, investment interest expense, casualty and theft losses of personal-use or income-producing property, and gambling losses.

In addition, each personal exemption claimed by a married couple filing jointly is reduced by 2 percent for each $2,500 of adjusted gross income above $300,000. At $425,000, their personal exemptions are completely phased out.

The threshold for a single filer is $250,000, and the exemption ends at $375,000.

The increases related to the health-care law are a surcharge of 0.9 percent on wages and self-employment income above $200,000 for single filers and $250,000 for joint filers, and a surcharge of 3.8 percent on net investment income for people whose adjusted gross incomes top those thresholds.

Investment income includes rent and royalty income and passive income, as well as dividends, interest and capital gains.



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