Wrap Up Last-Chance Tax Breaks for 2013

The holiday season can be a difficult time to think about taxes. But with a few last-minute maneuvers, you might be able to reduce the amount of money you owe Uncle Sam for 2013.

Here are six strategies to consider. But don’t delay. Once the ball drops on New Year’s Eve, these tax breaks will be gone.

1. Take Charge of Charitable Donations. If you make a donation of cash to charity in 2013, you can generally deduct it on your 2013 tax return. So donations made late in the year can reduce this year’s tax liability.

But you may not have the cash on hand for an extra-generous contribution. Possible solution: Charge the donation on one of your credit cards. As long as the donation is posted with a December date, it’s still deductible in 2013 — even if you don’t actually pay the credit card charge until 2014.

Speaking of charitable deductions, don’t forget to drop off any donations of clothing and other household items to a qualified charity by December 31.

2. Balance Investment Holdings. Take a look at your portfolio for underperforming stocks that can be sold at a loss by the end of the year. You can deduct up to $3,000 worth of net capital losses (in excess of gains) against other income.

But be careful: If you make a “wash sale” by buying back the same security within 30 days, your loss is disallowed.

You can also reduce your capital gains or magnify your losses by selling your highest-cost shares with the “specific ID method.” To take advantage of this method, you must tell your broker at the time of the transaction which shares you want to sell. Ask your broker for a written confirmation. Without this procedure, you must use the “first-in, first-out” method, which means the shares you acquired first must be considered the ones sold.

Tax Filing Facts

The average refund for the 2013 tax filing season was $2,744 (compared with $2,794 for the previous filing season).

More people filed electronically this year — approximately 122.5 million returns compared with about 119.5 the previous year.

— IRS

3. Secure College Tax Breaks. Do you have a college tuition bill that’s due in early 2014? If you pay it this year, you can take advantage of the American Opportunity college credit or the Lifetime Learning credits on your 2013 tax return. You’re allowed to prepay for academic periods beginning the first three months of 2014.

4. Take Required IRA Distributions. If you’re due to take a mandatory withdrawal from a retirement account for 2013, don’t forget to complete the transaction by December 31. Neglecting to do so can result in a 50 percent penalty on the withdrawal you should have taken.

5. Consider a Roth Conversion. December 31 is the deadline to convert a traditional IRA into a Roth IRA. You have to pay income tax on the amount placed in the Roth account but you escape taxes on future earnings that accumulate.

If the value of your IRA is currently down, the tax cost of converting your traditional IRA to a Roth IRA will be lower too. What if you converted to a Roth IRA earlier this year when your IRA was worth much more? You can change your mind by “recharacterizing” the conversion by the end of the year. Then, you’ll have a regular IRA again.

Once you recharacterize to a regular IRA, you can switch back or “reconvert” to a Roth IRA and owe a lower tax bill. But you have to wait 30 days after the recharacterization, or until the next calendar year, whichever is later.

Remember that converting an IRA results in an increase in your adjusted gross income, which can in turn make you ineligible for certain tax breaks. A boost in your income can also make some or more of your Social Security benefits taxable. The rules are tricky so consult with your tax adviser.

6. Make Flexible Spending Account Decisions and Appointments. Do you have money set aside in a tax-advantaged flexible spending account (FSA) to pay medical expenses? These accounts may have a “use-it-or-lose-it” feature on money left at the end of the year. Plan now to deplete any balance by filling prescriptions, buying eyeglasses or getting a dental check-up.

This fringe benefit enables an employee to pay health care expenses with pre-tax dollars earmarked in a special account. Now is also the time of the year when you must choose the amount you want to set aside for 2014.

Consider the “use it or lose it” aspect before you make your designation for next year. There may be some flexibility. If your employer elected to allow a grace period, you have 2 1/2 months after the end of your plan year to spend out the balance in your FSA.

There is also a new, optional piece of flexibility added to FSAs. It’s a carryover option that will allow you to carryover up to $500 to the next year without a penalty. Again, your employer must amend the company plan to allow the carryover. A plan cannot use the grace period and the carryover, but must choose between them for all participants.

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