With only one week left before the New Year, there is still time for taxpayers to take steps to lower their 2013 federal income tax.
Following are some of the most common methods that taxpayers may be able to maximize their tax savings.
Shift Income and Expenses
One of the easiest methods to reduce taxable income in the current year is to shift your income or expenses where possible. In the case of income, if you can delay earning that income until 2014, you will not have to report the income on your tax return until next year.
Likewise, if you are planning to make deductible expenses in the near future, make those expenses in 2013 if possible, so that you can deduct those expenses on your current tax return rather than having to wait until next year to gain the tax benefit.
Make Charitable Contributions
There is an almost endless list of charitable organizations that could use a donation at the end of the year to help individuals in need around the holidays. A donation to a charitable organization can be used to reduce income for taxpayers who elect to use itemized deductions on their federal income tax returns.
If you decide to donate money or goods to a charity solely or in part for the tax benefit, be sure the organization you select is on the IRS’s list of qualified charitable organizations and that you obtain the appropriate evidence to support your deduction.
Increase Contributions to Retirement Accounts
Contributions to 401(k)s, IRAs, and other tax-deferred retirement accounts are not taxable in the current tax year. Therefore, if you have not made the maximum allowed contribution to these types of accounts, you can increase your contribution to reduce your taxable income.
For 2013, the maximum amount a taxpayer can contribute to a 401(k) is $17,500, or $23,000 if the taxpayer is age 50 or older. The maximum amount a taxpayer can contribute to an IRA is $5,500, or $6,500 if the taxpayer is age 50 or older.
In the case of IRAs, taxpayers have until April 15, 2014, to make contributions and still elect to apply them to their 2013 federal income tax return.
Spend Funds Remaining in Flexible Spending Accounts
Many employers offer flexible spending accounts to which employees can contribute tax-free funds that can be spent on medical expenses. The catch for many of these funds is that if a taxpayers do not spend the funds they elected to contribute to the flexible spending account in the current year, they will lose those funds.
While ensuring all flexible spending account funds are used does not directly reduce a taxpayer’s taxable income, it does make sure taxpayers do not waste the tax-free dollars available to them.
Speak with a Tax Professional about Tax Tips
Before making use of these or other approaches for reducing federal income tax, taxpayers may want to speak with a tax attorney about their individual tax situation. Whereas the methods noted above can often be used in a variety of tax situations, an analysis of a taxpayer’s specific circumstances can provide options that will definitely work for that taxpayer.
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Mark has been a contributor to legal web sites related to bankruptcy, tax, and criminal law since 2011. He has an Accounting degree from Texas A&M University.