Today, we will address the benefits of either accelerating your income into 2013 or deferring your income into 2014 depending on your financial situation.
Accelerating Income into 2013
It may be prudent to accelerate income into 2013 where the taxpayer will have more income in 2014, with the potential of being in a higher tax bracket and/or being subject to one or more additional taxes. One common strategy is harvesting gains from the taxpayer’s investment portfolio. However, in doing so, practitioners must take into account whether such acceleration will cause the taxpayer to be subject to the 3.8 percent net investment income tax.
Another option, which is new for 2013, is to have a taxpayer with a 401(k) plan that includes a qualified Roth contribution program to transfer an amount from his or her regular preelective deferral account into a designated Roth account in the same plan. In 2012, this was allowed only for participants who were at least 59-1/2 years old. That age limitation does not apply in 2013 and, while the transfer is subject to regular income tax, no early distribution penalty applies.
Besides harvesting gains, other options to accelerate income into 2013 include:
- if a taxpayer owns a traditional IRA or a SEP IRA, converting it into a Roth IRA and recognizing the conversion income this year;
- taking IRA distributions this year rather than next year;
- for self-employed individuals with receivables on hand, getting clients or customers to pay before year end, but being mindful of the .9 percent additional Medicare tax on self-employment income over $200,000 ($250,000 for joint returns); and
- settling lawsuits or insurance claims that will generate income.
Deferring Income into 2014
For high-income taxpayers, especially those that may be subject to the 3.8 percent net investment income tax or the .9 percent Medicare tax, it may make sense to defer income into the 2014 tax year if the client expects a decrease in income in 2014 or to generally be in a more advantageous tax situation. Some options include:
- if a client is due a year-end bonus, having the employer pay the bonus in January 2014;
- if a client is considering selling assets that will generate a gain, postponing the sale until 2014;
- delaying the exercise of any stock options;
- considering an installment sale if property is being sold;
- parking investments in deferred annuities;
- establishing an IRA, if the applicable income requirements are met; and
- putting the maximum salary allowed into a 401(k) before year end.