If you haven’t filed yet, here are four reason for doing some tax planning before filing your 2013 taxes. For 2013’s taxes, there are new tax brackets, taxes, and phaseout limits that make tax planning even more important, as follows:
- The 15% Tax Bracket
If you are in the 15% bracket or below, and you have qualified dividends or capital gains income, you do not get taxed on that income. However, if you are above the 15% bracket you will get taxed on it. The 15% tax bracket ends at $36,250 in taxable income (see definition below) if you’re single and $72,500 if married and filing jointly.
- The 3.8% Net Investment Income Tax
This tax on net investment income (dividends, interest, capital gains, rental income, etc.) begins at modified adjusted gross income (see definition below) of $200,000 for single, and $250,000 for married filing jointly.
- The Phase-Out of Exemptions and Itemized Deductions
Taxpayers with adjusted gross income (see definition below) over $250,000 single and $300,000 married filing jointly will have some of their exemptions and itemized deductions reduced. If these items have not already been in effect taken away by AMT, then you should pay attention to getting your income below these levels if you’re close to the threshold.
- Tax Credit Phase-Outs
Two common tax credits have phaseout limits as follows:
- The American Opportunity Credit – modified AGI (see definition below) of $160,000 for Married Filing Jointly and $80,000 if Single.
- The Child Tax Credit – Modified AGI of $110,000 for Married Filing Jointly and $75,000 for Single.
If you are close to any of these income levels, you should consider taking steps to lower your income. Please see my blog post about saving money on your taxes to see what you can do now to lower your income and your taxes even though it’s already 2014.
Quick and Dirty Definitions
Adjusted Gross Income (AGI) – Your income before exemptions and itemized deductions on Schedule A are subtracted. On your tax return, this would be the number at the bottom of the first page and the top of the second page.
Modified Adjusted Gross Income (MAGI) – This is the same as AGI except with some addbacks, such as your IRA contribution, excluded foreign income, and tuition deductions.
Taxable Income – This is your income after taking out exemptions and itemized deductions, but before tax credits. On your tax return, this is the line right before “taxes”.