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Five Easy Ways To Save On Your Taxes

As you agonize over your 2013 tax return and see the sting the new tax law is inflicting, here are some ways to reduce the bite. Some are retro-active to last year so there is still time to act.

Briefly, the “American Taxpayer Relief Act of 2012” effective for 2013 eliminates virtually all of the tax preferences of the Bush administration. It increases the top tax rate from 35% to 39.6% and overlays an additional .9% Medicare surcharge on incomes over $250,000 for married tax filers and $200,000 for singles. For high incomes, the new law also eliminates personal exemptions, phases out the benefits of itemized deductions such as interest, state income tax, and property taxes, imposes a Medicare surcharge tax of 3.8% on excess investment income and higher capital gains tax rates. Federal taxes, when combined with state income taxes (especially in high-tax states such Oregon and California), yield tax rates over 50%.

So what can you do?

If you have self-employed income such as consulting fees, you can open a Qualified Retirement Plan (“QRP”) with your broker by completing a few simple forms. A QRP is essentially a personal retirement plan that enables you to contribute up to 20% of the net profits from consulting or similar income up to a maximum of $51,000 for 2013. This is in addition to any 401(K) contributions that you may have from your regular job. You can still open an account now and make a contribution against 2013 taxes.

Second, if you have a new-high deductible health care plan you are now eligible for a Health Savings Account (“HSA”). An HSA is a separate account where you can contribute extra money to pay for medical costs that aren’t covered. If you are married, you can contribute up to $6,550 ($7,550 if over age 50) annually for 2014 and slightly less for 2013. The contributions are 100% tax deductible and there is no income limit. When you withdraw money for qualified medical expenses it is not taxed and you can carry over unused amounts in perpetuity. All income earned is tax free and you can even invest in mutual funds. This is a terrific benefit! You may want to look at your insurance needs and the combination of a high-deductive plan coupled with an HSA may be right for you. And like a QRP, you can still make tax deductible contributions now against your 2013 taxes.

Third, if you have children or young relatives and would like to give them a gift, I recommend setting up a college fund using your state’s 529 program. This is a fantastic way to fund college as income earned in the plan is tax free and qualified withdrawals are not taxed. In some states, such as Oregon, you can deduct the contributions against your state income taxes resulting in a nice benefit for doing a good thing.

Fourth is the tried and true use of tax-exempt interest income. This is one of the few items that passed thru the new law with minimal impact. It is even a better deal now with the new high tax rates and the very low rates on bank accounts and CDs. They normally take the form of city or state issued notes and bonds and the interest is excluded from your taxes so this may warrant a renewed look.

Last, I encourage you to review year-end brokerage statements and not rely solely on downloading the data directly into Turbo Tax. In my case I had several thousand dollars of “accrued interest” that required a manual adjustment; otherwise I would have paid tax on interest I did not earn.

I hope you find these useful with the usual disclaimer of reviewing your tax situation with a tax professional to fully understand all the issues.

Ray Link is a CPA and holds an MBA from the Wharton School. He is EVP/CFO of FEI Company (NASDAQ: FEIC), a world leader in nano-scale imaging for industry and science. He is also on the on the Board of Directors of Cascade Microtech (NASDAQ: CSCD) and nLight Photonics.

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One Response to Five Easy Ways To Save On Your Taxes

  1. Scott says:

    Great additional benefits for added information Ray, while I miss the beauty of Portland, I don’t miss paying the taxes for it. These are some great ideas for me to look at further.

    One of the few conservative visitors

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