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It pays to take action now on finances, taxes


As the year winds down, wealthier taxpayers are examining whether they can avoid higher federal tax rates for 2013, while those with more modest incomes are pondering whether they can qualify for subsidies for Obamacare health care premiums next year.

Meanwhile, married same-sex couples are preparing for their first opportunity to file federal tax returns as married people next year. And teachers, retirees and those going through foreclosure are looking at tax breaks that may not be extended beyond 2013.

Fall is a natural time for year-end tax and financial planning. And local accountants and financial planners are encouraging their clients to examine their finances and to make changes now to improve their bottom lines.

"Do nothing is the worst planning you can do," said Bruce Dzieza, CEO of Willow Creek Wealth Management in Sebastopol.

Maria Thomas, a CPA and partner at Phillips & Thomas in Santa Rosa, said the year-end planning offers clients the chance to reduce their tax liability but also to prepare if they may owe extra taxes next April.

"Then they have four or five months to plan for it, rather than to find out a month before that they owe $10,000," said Thomas.

This year features some noteworthy tax changes, especially for higher-income taxpayers.

The highest tax rate has been raised for 2013 to 39.6 percent from 35 percent for married couples with at least $450,000 in taxable income and for individuals with at least $400,000.

Capital gains taxes for Americans in that highest tax bracket have jumped to 20 percent, up from 15 percent.

As well, the Affordable Care Act, also known as Obamacare, places a 3.8 percent tax on married couples with at least $250,000 of income and for individuals with at least $200,000. Those with similar incomes also are subject to an added Medicare Tax of 0.9 percent.

Experts said high-income taxpayers should avoid spikes in capital gains and other income this year that will push them into the highest bracket.

"If they're close, they don't want to trip on that 20 percent tax" for capital gains, said Dzieza.

One possible strategy is to delay income until 2014.

However, another group of taxpayers may be seeking ways to reduce their income in 2014. Those are Americans who want to qualify for the subsidies that will become available next year under the Affordable Care Act.

Individuals earning up to $45,960 and families of four earning up to $94,200 next year may qualify for a subsidy, according to a report by tax analyst CCH of Riverwoods, Ill.

The Kaiser Family Foundation in September estimated the cost savings for a husband and wife, both aged 60, nonsmokers and with an annual household income of $25,000. It concluded the couple could receive a monthly subsidy of $1,271 for a health care policy that would cost $1,365.

As an example, Dzieza said, some seniors under 65 might choose to postpone the start of their pension or their Social Security benefits in order to qualify for the subsidy.

For business owners, one key tax break that will shrink dramatically next year involves the purchase of certain capital equipment. The deduction limit is $500,000 this year, but is scheduled to fall to $25,000 in 2014.

"If you're going to purchase equipment anyway, this is a good year to do it," said Judith Glenn, a CPA and partner at Glenn, Guattery, Gunn & McAravy in Santa Rosa.

Another group of tax breaks, often called "extenders," will go away unless Congress acts to extend them.

Included is a $250 deduction for teachers for unreimbursed classroom expenses. And without congressional action, retirees aged 70? and older in 2014 would no longer be able to donate up to $100,000 tax-free to charity from an IRA rather than take an itemized deduction.

Also slated to end is the exclusion for canceled debt from a principal residence. Without the exclusion, many homeowners who go through foreclosures or short sales are required to report the canceled debt as income. (In a short sale, the home is sold for less than the amount owed on the mortgage.)

Thomas noted that a similar exclusion ended last year for homeowners paying California state taxes. Even so, she encouraged those who can to complete their foreclosure or short sales by Dec. 31.

As a result of the U.S. Supreme Court decision last summer striking down key parts of the Defense of Marriage Act, the IRS announced it would recognize same-sex marriages nationwide. For 2013 tax returns, same-sex spouses generally must file using a status of married filing separately or jointly.

Same-sex spouses who were legally married in past years may consider whether they would benefit by amending eligible returns by instead filing with a new status of married separately or jointly.

While noting the many changes for 2013, the experts also pointed to a few areas that most taxpayers should consider. The first has to deal with planning for the future.

Glenn said she asks clients, "Are you maximizing your contribution to your retirement plans?"

At a minimum, Dzieza said, workers should match the 401(k) contributions offered by their employers. Many workers at local companies could receive an added 3 to 5 percent of their income specifically designated for retirement.

"We see way too often that they're not even doing that," he said.

Taxpayers with stocks, bonds and other capital assets should decide whether they will sell any before year's end. Those who do may have capital gains or losses that can affect the taxes they pay. One strategy is to offset gains by selling poorly performing assets at a loss.

The experts even noted one bright spot on capital gains. Those in the 10 or 15 percent tax brackets — up to about $72,500 of taxable income for a married couple filing jointly — continue to pay no taxes for capital gains.

Thomas said that benefit is worth exploring, especially for those whose income next year may rise into the next tax bracket. In that case, the capital gains tax would jump to 15 percent.

Taxpayers should consider speaking to a tax professional about their unique situations, the experts said.

Dzieza, a certified financial planner, said he often encounters those who are unnecessarily worried after hearing vague news about how some tax rule may affect them. Some good advice from a CPA or other tax professional can clear up the concern.

"Nine out of 10 times it isn't as bad as you think it's going to be," he said.