As the days get shorter and temperatures drop, the countdown begins on the time available to take advantage of many year-end tax planning techniques. Despite the short time remaining, many techniques and strategies can still be utilized to successfully manage income taxes, and gift and estate taxes. Here are a few tax planning techniques that can still be implemented during 2013:
1. Make Gifts
Making annual exclusion gifts is a highly effective way to reduce your taxable estate. Under federal gift tax laws, each individual is permitted to gift up to $14,000 in cash or other property each calendar year to an unlimited number of individuals without incurring any gift tax. A married couple can together gift up to $28,000 tax-free, to an unlimited number of individuals each year.
In addition to annual exclusion gifts, you may want to consider using your federal lifetime gift tax exemption of $5,250,000—just be aware that the lifetime exemption against the new Minnesota gift tax is limited to $1,000,000 for gifts made after July 1, 2013. Current federal and Minnesota laws allow individuals to give up to these amounts, free of transfer taxes. In addition, though the Minnesota lifetime gift tax exemption amount will stay the same, the federal exemption amount is indexed for inflation, so even if you used your full federal exemption in 2012, you still have another $130,000 to give away this year free of taxes. In 2014, the federal exemption amount will increase by $90,000 to $5,340,000.
2. Reduce Exposure to 3.8% Tax on Net Investment Income
Beginning in 2013, trusts, estates, and individuals are subject to a new 3.8% medicare surtax on net investment income when adjusted gross income exceeds a certain threshold. For single taxpayers, that threshold is $200,000; for married taxpayers, the threshold is $250,000; and the threshold for trusts and estates is $11,950. A number of planning strategies have been developed to manage the new 3.8% surtax, including distributing income from a trust to individual beneficiaries, investing in tax-exempt bonds, and reducing net investment income.
3. Engage in Tax-Loss Harvesting
To reduce your income tax liability and net investment income, you may want to engage in tax-loss harvesting, whereby you realize losses on investments to offset capital gains or to reduce taxable income. Tax-loss harvesting involves selling investments that have decreased in value before the end of the year. Proper tax-loss harvesting allows you to carry your loss forward to offset any future capital gains.
4. Charitable Giving
Charitable giving is an excellent way to reduce both your taxable estate and your income tax liability, all while doing something for the greater good. Donating appreciated stock is one of the most tax-efficient ways to make a charitable gift because in many cases you can receive a tax deduction for the full fair market value of the gifted assets. For individuals age 70½ and over, making charitable contributions from your IRA also presents an effective tax saving opportunity because you can satisfy your required minimum distribution amount up to $100,000, without recognizing additional income. It is important to consider the timing of charitable contributions, and the type of property contributed, to maximize your tax savings.
We Can Help
Please contact Maslon's Estate Planning Group if you have any questions about these techniques or wish to discuss other ways to reduce your income tax, gift tax, or estate tax liability.