May 22, 2018
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A taxing new year: How to prepare for financial changes in 2013

By Katherine Boyle, The Washington Post

With all the holiday hoopla of parties and presents, no one could blame you if you’re spending more time thinking about tinsel than taxes. But the biggest financial mistake you can make this season is forgetting that 2013 will bring sweeping changes to the tax code, even if the “fiscal cliff” is averted.

“These are unprecedented changes to tax law,” said Gil Charney, principal tax analyst at the Tax Institute at H&R Block. “The exemptions you qualified for before you may not qualify for now. Your situation may not have changed, but the laws themselves are in the state of flux.”

New tax rates and changes to deductions are complicated — even professionals acknowledge that they’re confusing. We’re not going to explain expiring payroll tax cuts or the Affordable Care Act minutia here, because everyone’s tax situation is different. But there are some basic tax truths to know before 2013 comes, and our usual end-of-the-year “donate to charity” pitch may be more useful than ever for decreasing tax liability. Here’s a simplified list of things to learn and do before 2012 ends. If nothing else, we hope it encourages you to bug your financial adviser — or find one.

First, stay calm

If you haven’t looked into impending changes to the tax code, don’t worry. Charney says there’s still time: “There are provisions that already expired in 2011, expiring laws in 2012 and potential changes in 2013 that all affect taxes this year. … Get a handle on where you are with your tax situation.” But he cautions against making charitable or investment decisions based on taxes alone. The cry to sell off investments before capital gains rates go up may not make sense for your portfolio. Be vigilant, but keep some perspective.

Make charitable donations in 2012

Charney says there has never been a better time to donate to charity. “It’s a good tip because you have control over it — how much you want to give and to whom,” he said. And the discussion about limiting itemized deductions is leading more people to donate large amounts to charity this year, Charney said. But ask yourself: Are you itemizing? “If you can’t itemize,” Charney said, “you get no tax benefit for charitable contribution.” And if you didn’t itemize last year and your financial situation hasn’t changed, it may not benefit you to do so this year.

Remember that mileage

People often forget to deduct mileage expenses if they travel to a charitable activity or drop off donated goods. It can be tedious to keep a log of these miles. “Some people don’t think it’s worth the hassle,” Charney said. But if you frequently travel to charitable activities, the 14 cents per mile adds up.

Donate used goods wisely

Don’t donate a sweater and expect it to have a big impact on your taxes. There are strict guidelines for donating used goods, and depreciation matters. But if you have been considering donating a high-value item, such as a car with a fair-market value of $5,000, the impending changes to tax code are likely to make it better for you to donate it in 2012.

Buy depreciable equipment

Small-business owners in need of new depreciable equipment might want to consider making the purchase before Dec. 31 because of a significant change in depreciation deductions. “In 2012, you could deduct as much as $139,000 for equipment that depreciated over time,” Charney said. “In 2013, the limit is $25,000. The amounts have been kept high because of special laws [to stimulate growth], but the provisions are reverting to smaller amounts next year.”

Go to the doctor

The threshold for deducting medical expenses is set to rise next year. Currently, most people can deduct medical expenses after they pass 7.5 percent of adjusted gross income. For most taxpayers, that number will rise to 10 percent next year. That may seem like a high threshold, but if you’re deducting yourself, your spouse and dependents, the costs add up. The Internal Revenue Service says payments to doctors, dentists, in-patient hospital care or nursing-home services can be included.

Write next semester’s tuition checks

If you’re a college student or the parent of student, you can pay the tuition bill for spring semester this month to decrease tax liability for 2012. “The American Opportunity [Tax] Credit expires in a couple weeks, and it was much more generous version of the 2009 Hope credit it replaced,” Charney said of the program, which gives up to a $2,500 tax credit to pay for college expenses. “If it’s not extended into 2013, it makes even more sense to make the payment in 2012.”

Tax credits are expiring/have expired

Charney noted that in addition to the American Opportunity Tax Credit expiring, the child tax credit is decreasing from $1,000 to $500 in 2013. But there were a lot of tax credits that expired in 2011, affecting education, business and energy. “You could have bought a new air conditioner early in 2012 and expected a credit this year,” but the tax credit for energy-efficient home appliances expired last year, Charney said. Talk to a financial adviser about the expirations that will affect you or go to the IRS’ Web site for a list.

Don’t go it alone

Nervous about all this? We are, too. Don’t go it alone. Get some last-minute tax tips from an accountant or a tax preparer if you’re unsure how the changes will affect you. Even if you’ve relied on tax software in past years, your taxes may not be the same in 2012. And in 2013, they’re certain to change.

The Bottom Line: The new year is only a few weeks away, and the tax code is changing. If you have investments or are planning to make charitable gifts, the changes are likely to affect you. Talk to your tax adviser (or find one soon) and know what’s coming in 2013.

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