Last year around tax time, the New York Times reported a chilling prediction for 2013. The report calculated that taxes will increase by thousands of dollars for many American families. Well, believe it or not that prediction has come true!
Most Americans are aware that the U.S deficit is growing at an alarming rate, so it is not entirely a surprise that taxes are also on the rise. A key fact to consider is that these new tax increases impact just about everyone, not just the super wealthy. So how do you protect yourself?
The best way to begin defending yourself against these tax hikes is to understand the truth behind the new changes. This way, you can plan and prepare to ensure that you are not stuck with a large tax bill come April 2014. If you are a real estate investor, small business owner or a full time employee, you will want to make sure you plan ahead.
You may need to pay more taxes if you:
- Earn $200k per year individually or $250k as a couple, or
- Own investment properties that have appreciated significantly in value, or
- Own a business or real estate that you eventually plan on selling
If you met any of the criteria above, don’t panic just yet. There is still time to plan and make sure you are protected from the new tax increases. Here are some tips to consider:
Old Strategies Still Work:
For some high income earners this year, capital gains taxes have increased. That’s not the only bad news… on top of the capital gains tax increase there is also a brand new tax for anyone who makes more than $200,000 per year. For real estate investors, this can have a profound impact, especially if you are thinking about selling a property this year. Traditional tax deferral strategies like a 1031 exchange or seller financing can actually save you more money than it did in the past. Consider those options if you are thinking about selling your investment property, and make sure you give your tax advisor a call to crunch the numbers. Most of the time people are surprised to learn that old strategies can save them more than they originally thought.
Fortify Your Home:
Don’t overlook the perks of owning a home. Some advantages are being able to write off your mortgage interest and being eligible for tax-free debt forgiveness. However, this year beware! If you have a gain that exceeds the exclusion amount for selling your home, you may be subject to an additional 3.8% tax.
Must-Know Strategies for 2013
Old strategies should not easily be pushed aside for this year as they still have some life to them and may continue to save you significantly in taxes. Depreciation is a perfect example of how you can reduce your overall taxes and retain your cash flow. So make sure you are writing off the purchase price of you investment properties over time with the correct depreciation.
Real estate professional status is a powerful strategy that real estate investors can still take advantage of. If you are spending more time in real estate related activities then in your regular W2 job, then you may qualify to take unlimited tax deductions for your real estate without having your real estate license. This strategy can help you to significantly decrease your taxes in these rising tax years.
In order to permanently protect yourself from rising taxes, you should consider having a Roth retirement account. A Roth IRA or Roth Solo(k) will allow you to truly take advantage of tax-free money. If you do not have one yet, it is not too late to open one for 2013. With the new taxes on the horizon, everyone should have a bucket of Roth money that is tax free – permanently.
Don’t be caught off guard during tax time with a huge tax bill. You have plenty of strategies at your fingertips to help ensure your hard-earned money won’t be depleted by taxes. All you need to protect yourself from Taxmaggedon is to work proactively with your tax advisor to put a plan in place now to protect your bottom line.
Photo Credit: SalFalkoTaxmaggedon: What Does it Mean for 2013? by Amanda Han