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Tips for 2013 tax returns

Seven ways to help avoid unpleasant surprises and possibly even lower your tax bill.

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For the first time in several years, the new year arrived without a lot of last-minute federal tax legislation. That is good news for taxpayers trying to figure out where they stand before dropping their tax returns into the mail—or hitting the “send” button—by midnight on April 15.

But less confusion doesn’t necessarily mean you’ll owe less in taxes. In fact, if you’re a high earner or had a good year in the stock market—as many investors did—you could see a significant increase in your tax bill, thanks to a new top tax bracket, a higher top rate for capital gains, Medicare tax increases for some taxpayers, and the return of PEP and Pease (i.e., the phase-out of itemized deductions and personal exemptions).

No matter what your income level, however, it’s wise to start preparing early for the April 15 tax-filing deadline. In addition to helping you avoid unpleasant surprises and possibly even helping you lower your tax bill, evaluating your tax situation now could reveal areas where you can implement a smart tax strategy in 2014. Here are seven things to keep in mind as you prepare your 2013 return.

1. Begin the process early, but don’t necessarily file early.

If you like to be among the first taxpayers to get a refund, you’ll have to sit tight for a few extra days. The government shutdown last October put the IRS behind schedule in preparing for this year’s tax-filing season. So instead of starting to process returns on Jan. 21, as it initially intended, the IRS will start opening the first returns on Jan. 31. Also, Fidelity mails or makes available online each type of tax form by its IRS deadline—February 18 for most forms.1 Many people are familiar with the end-of-January deadline for W-2s from employers, but reporting deadlines for most types of accounts held at Fidelity are actually later. See the mailing dates for Fidelity tax statements and forms.

2. Contribute to a tax-advantaged account to reduce your taxable income.

For many taxpayers, contributing to a tax-advantaged savings account provides the biggest potential for tax savings. Although it’s too late to make 2013 contributions to a 401(k) or similar workplace savings plan, you might still have other options. The rules for IRAs, SEP-IRAs, and health savings accounts (HSAs) all allow 2013 contributions to be made right up to the tax-filing deadline. If you don’t already have one of these accounts, you can still open one before April 15 and make a 2013 contribution, if you are eligible. Here’s a quick overview of each, but you’ll need to explore them further to understand their tax advantages and eligibility requirements.

The rules for IRAs, SEP-IRAs, and HSAs
Eligibility 2013 contribution limits Tax advantages
Traditional IRA
  • Under age 70½
  • Must have employment compensation
  • $5,500 under age 50
  • $6,500 age 50 or older
  • Tax-deferred growth2
  • Contributions may be tax deductible3
SEP IRA
  • Must be a sole proprietor, a business owner, in a partnership, or earning self-employment income by providing a service
Lesser of:
  • 25% of compensation
  • $51,000
  • Tax-deferred growth2
  • Contributions may be tax deductible3
Health Savings Account
  • Covered by a high deductible health plan
  • Not enrolled in Medicare
  • Cannot be claimed as a dependent on another person’s tax return
  • $3,250 for singles
  • $6,450 for families
  • $1,000 additional if age 55 or older
  • Triple tax advantage: Contributions, earnings, and withdrawals are federal tax free when used for qualified medical expenses

3. Take advantage of time-savers.

Even if somebody else prepares your tax return, gathering documents and evaluating your options can be time consuming. But you might be able to take advantage of a couple of options that could make life just a bit easier at tax time.

Consider the new simplified option for home office deduction. Rather than filling out a 43-line form that requires you to enter a percentage of household expenses for utilities, mortgage interest, repairs, and other items, you can simply deduct $5 for each square foot of home office space you use as an office. The limit is 300 square feet, for a maximum deduction of $1,500. Keep in mind that your home office must still meet certain requirements, such as being used regularly and exclusively for business.

Since 2005, taxpayers have had the option of deducting sales tax instead of state and local income tax. That’s a big benefit for people who itemize their deductions and live in states with low or no income tax. But keeping track of all your sales receipts can be challenging. There is a way around the paperwork, however. You could use the IRS Sales Tax Deduction Calculator, which provides a number based on your location and income, plus big-ticket purchases such as cars or homes.

Another potential time saver is electronic filing. In addition to saving you a trip to the post office, e-filing could speed up your refund or let you know sooner if the IRS sees a problem with your return. If your adjusted gross income was under $57,000, you can use the IRS’s Free File service to file electronically at no cost using commercial tax preparation software. If your AGI was higher, you can still file for free on the IRS Web site using online “fillable” forms, but they’re much less user-friendly than commercial software. Fidelity offers $20 off TurboTax®, which provides federal e-file at no cost.

4. If you’re a high earner, see whether you underpaid taxes.

For 2013, Congress enacted several tax increases for people with high income, including:

  • A new top marginal tax rate of 39.6% (it was 35% in 2012) on income above $400,000 for singles and $450,000 for married couples filing jointly.
  • A new 20% tax rate on capital gains and qualified dividends (it was 15% in 2012) for taxpayers who are in the 39.6% marginal tax bracket.
  • A 3.8% Medicare surtax on the lesser of net investment income or modified adjusted gross income above $200,000 (singles) and $250,000 (couples).
  • An additional Medicare payroll tax of 0.9% on earned income above $200,000 (singles) and $250,000 (couples).

High-income taxpayers are also subject to limits on exemptions and deductions in 2013. The income threshold for the Pease and PEP (personal exemption phaseout) limitations is $300,000 in adjusted gross income (AGI) for joint filers and $250,000 for singles. The Pease limitation reduces the value of charitable contributions; mortgage interest; state, local, and property taxes; and miscellaneous itemized deductions. For 2013, this limitation is the lesser of 3% of AGI above the threshold up to 80% of the amount of the itemized deductions otherwise allowable. The PEP limitation reduces the total personal exemption by 2% for every $2,500 of income above the same income thresholds with no upper limitations. That means it's possible for some taxpayers to completely phase-out of their personal exemptions.

At this stage, there’s not much you can do to significantly alter your tax liability, but you can be prepared for the possibility that you underpaid. For example, your employer is required to withhold the additional 0.9% Medicare tax when your income exceeds $200,000, but a situation in which two spouses both earn less than $200,000 but jointly more than $250,000 could have resulted in underwithholding.

Also, taxpayers with significant capital gains and those subject to the new Medicare surtax may be required to make estimated quarterly payments. If you didn’t properly anticipate the effect of the tax increases, you might have paid too little, which could result in a penalty in addition to any taxes you may owe. After running some preliminary calculations—or consulting with a tax professional—you might want to start setting aside the money you’ll need come April 15.

5. Purchase health insurance by March 31 if you aren’t already covered.

Take on taxes

Get more information about changes for 2013, and tax-sensitive investing, saving, and estate planning strategies.

Read more Viewpoints articles.

This item won’t affect your 2013 tax return, but uninsured Americans who fail to enroll in an approved health insurance plan under the Affordable Care Act by the end of March could incur a penalty on their 2014 returns. March 31 is the open enrollment deadline—the last day you can sign up for 2014 coverage unless you faced a life-changing event. Although the law requires coverage for all of 2014, the government isn’t going to enforce the penalty on the months you didn’t have coverage if you choose a plan by the March 31 deadline and are covered by May 1. Otherwise, the penalty for 2014 would be the greater of 1% of annual household income or $95 per uninsured adult and $47.50 per child, up to $285 for a family. The penalty is prorated according to the number of months without coverage.

6. For same-sex spouses, choose your federal filing status.

It’s a milestone tax year for legally married same-sex couples. After the U.S. Supreme Court invalidated a key provision of the Defense of Marriage Act, the IRS issued new rules stating that same-sex couples who are legally married in any state will be treated as being married for federal tax purposes, regardless of whether the state where they currently reside recognizes same-sex marriage.

That means that married same-sex couples must make a decision—whether to file a joint return or to file as a married couple, filing separately. There are pros and cons to each method, so perhaps the best way to decide is to prepare your taxes both ways and see which one is best for your situation.

Also, you need to be aware that the IRS rules do not apply to state tax returns. Some states recognize same-sex marriage for tax purposes, others do not. If you live in a state that doesn’t, you might have to file three, or as many as four, returns: a joint federal return or two married-filing-separately federal returns, and an individual state return for each spouse. Read Viewpoints: What the Supreme Court ruling on DOMA means.

7. Use your 2013 tax return to start planning your 2014 tax strategy.

The biggest mistake made by taxpayers year in and year out is procrastination. The longer you wait to plan and implement an effective tax strategy, the more difficult it is to have a significant impact on your tax liability. As you prepare for your 2013 tax returns, you will get a good idea of your tax picture. Maybe you can increase your 401(k) contribution, reduce the impact of taxable distributions by investing in exchange-traded funds or municipal bonds, manage your charitable giving more effectively with a donor-advised fund, or pursue a wide range of other strategies. For ideas, read Viewpoints: “How to invest tax efficiently,” or watch the videos.

Taxes can be complex, and every taxpayer’s situation is different. These tips will help you get a good start on your 2013 tax return, but be sure to explore further, perhaps with the guidance of a tax professional, if you have specific concerns or circumstances.

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The tax information and estate planning information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice. Fidelity does not provide legal or tax advice. Fidelity cannot guarantee that such information is accurate, complete, or timely. Laws of a particular state or laws which may be applicable to a particular situation may have an impact on the applicability, accuracy, or completeness of such information. Federal and state laws and regulations are complex and are subject to change. Changes in such laws and regulations may have a material impact on pre- and/or after-tax investment results. Fidelity makes no warranties with regard to such information or results obtained by its use. Fidelity disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Always consult an attorney or tax professional regarding your specific legal or tax situation.

1. When IRS deadlines occur on a weekend or Federal holiday, the deadline is moved to the next business day. This year the normal February 15 mailing deadline falls on a Saturday in 2014. Due to the Presidents Day holiday, the next business day is February 18.
2. For traditional IRAs, penalty-free withdrawals include but are not limited to qualified higher education expenses, qualified first home purchase (lifetime limit of $10,000), certain major medical expenses, certain long-term unemployment expenses, disability, or substantially equal periodic payments.
3. For a traditional IRA, full deductibility of a contribution for 2013 is available to active participants whose 2013 modified adjusted gross income (MAGI) is $95,000 or less (joint) or $59,000 or less (single); partial deductibility is available for MAGI up to $115,000 (joint) or $69,000 (single). In addition, full deductibility of a contribution is available for working or nonworking spouses who are not covered by an employer-sponsored plan whose MAGI is less than $178,000 for 2013; partial deductibility is available for MAGI up to $183,000.
4. The Fidelity® Personalized Portfolios service applies tax-sensitive investment management techniques (including tax-loss harvesting) on a limited basis, at its discretion, primarily with respect to determining when assets in a client’s account should be bought or sold. Because it is a discretionary investment management service, any assets contributed to an investor's account that Fidelity® Personalized Portfolios does not elect to retain may be sold at any time after contribution. An investor may have a gain or loss when assets are sold.

Fidelity® Personalized Portfolios is a service of Strategic Advisers, Inc., a registered investment adviser and a Fidelity Investments company. Fidelity® Personalized Portfolios may be offered through the following Fidelity Investments companies: Strategic Advisers, Inc., a registered investment adviser; Fidelity Personal Trust Company, FSB (“FPTC”), a federal savings bank; or Fidelity Management Trust Company (“FMTC”). Nondeposit investment products and trust services offered through FPTC and FMTC and their affiliates are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency, are not obligations of any bank, and are subject to risk, including possible loss of principal. This service provides discretionary money management for a fee.
 
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