End-Of-Year Tax Planning, Part 3
The past two weeks we covered some last-minute tax-planning tips on what to do before the end of the year. Here is the final article in the series. If you need free tax help and qualify, visit artofthinkingsmart.com for more information, where you also will find top finance and tax apps for your mobile devices heading into 2014.
* Fund An Education. The American Opportunity tax credit, which was set to expire in 2012, was extended through December 2017. It is currently $2,500 for each qualifying college student in your family. The old Hope Credit only covered the first two years of college, but now the American Opportunity credit can be claimed for all four years of post-high school education. You can get the maximum credit if you spend at least $4,000 in qualifying expenses (books, tuition and fees). The full credit is available to individuals who make $80,000 or less, or $160,000 or less for joint filers. The credit is phased out for taxpayers with incomes above these levels.
* Go Green. Energy-efficient home improvements to your principal residence, such as installing a heat pump or solar panels, qualify for a federal tax credit of 30 percent of the cost. For solar, currently the state of Hawaii tax credit is 35 percent. Buyers of plug-in hybrids and electric cars benefit from a tax credit of $2,500 to $7,500, depending on the size of the battery in the car. The credits apply to plug-in hybrids purchased after 2010, though certain models may have been phased out.
* Contribute To Your Flexible Spending Account (FSA). The FSA is an employee benefit program that provides employees with a way to pay for qualified medical, dental and child-care costs with tax-free money. In 2013 and 2014, FSAs have annual limits of $2,500. The IRS changed the rules for 2014 and will allow employees with “cafeteria plan” FSAs to either carry over up to $500 of their account balance or have a two-and-a-half-month grace period. The grace period would allow employees to use money from the previous tax year to cover qualified medical expenses until mid-March of the next year. If offered, check with your employer for more information. Depending on your employer’s policies, you may lose any balance left in these accounts at the end of the year, so take advantage now by filling prescriptions or making doctor appointments.
* Don’t Forget The New Medicare Taxes. Beginning in 2013, two new Medicare taxes went into effect. The first was a new 3.8 percent Medicare tax imposed on profits from the sale of investment property. This includes capital gains, dividends, interest payments and net rental income, though distributions from qualified retirement plans are exempt. The tax applies to individuals earning $200,000 or more and joint filers with $250,000. The second tax was a 0.9 percent tax applied to wages and compensation in excess of $200,000 for single taxpayers, and $250,000 for joint filers. If you’re in the affected income bracket, speak with a tax professional to discuss how the new taxes will affect your tax burden this year.