We are now through the first 8 months of the year and, in my opinion, this is a good time for everyone to examine their personal tax situation. There have been a number of changes in the tax law and not all of them pertain exclusively to the wealthy. The rest of this article will outline some areas that I believe individuals should take a look at in order to avoid surprises in April.
Self-Employment Tax
If you are an individual that is self-employed (sole proprietor or single member LLC) and you are subject to self-employment tax it is important to realize that the rate for 2013 is 15.3% which is 2% higher than the rate was in either 2011 or 2012. If an individual is making $100,000 the extra $2,000 can be painful in April. In addition individuals that own interests in partnerships or LLCs may also be subject to self-employment tax.
Changes in your personal situation
There may be changes in your personal situation that can affect your tax liability. An example of this might be the child tax credit. There is currently a $1,000 tax credit for children under the age of 17. If you had a child that reaches the age of 17 in 2013 the credit that you had in 2012 will not be available in 2013. Additionally there are income limitations on this credit and if your income has gone up in 2013 you may have either a reduced credit or no credit.
Medical expenses which were previously deductible if they exceeded 7.5% of your income are not deductible unless they exceed 10% of your income in 2013 (unless you are a senior citizen in which case the 7.5% limit still applies in 2013).
In many instances individuals that have children in college are entitled to education credits either through the American Opportunity Credit or the Lifetime Learning credit. Both of these credits, however, have income limitations and therefore a credit you are counting on now may not be available to you. In some instances it may make sense for a parent to not claim the child as a deduction and allow the child to claim the credit. While this may raise the tax liability on the parents, the overall taxes on the family may be lower.
Taxpayers should of course be reviewing their investment activity as well. If a taxpayer has any capital gains they may want to start to look at stocks that are not doing as well that could be sold at a loss to offset the gains.
Conclusion
If you find that you are going to be underpaid at yearend you still have almost 4 months to remedy the situation which is much better than finding out a few weeks before your return is due. Once again if you’re not sure, then check with a tax professional to help determine your tax position.