Time for your mid-year tax checkup

  • By Pamela Yip The Dallas Morning News
  • Saturday, August 17, 2013 7:19am
  • Business

We’re more than halfway through the year, and it’s not too early to begin tax planning. Starting now gives you time to tweak your tax strategies for the year if you’re off track.

Higher-income Americans should take special notice this year because of rule changes in the American Taxpayer Relief Act of 2012.

For one thing, the law raised the top income tax bracket from 35 percent to 39.6 percent. For some, the tax rate on long-term capital gains and dividends rose from 15 percent to 20 percent.

Both changes affect single taxpayers with taxable income over $400,000 and joint filers with income over $450,000.

Taxpayers at certain income thresholds also face limits on personal exemptions and itemized deductions and may face new Medicare surtaxes.

If your income isn’t subject to withholding, you will have to pay estimated taxes. This includes income from self-employment, interest, dividends, alimony, rent and gains from the sale of assets, prizes and awards. You also may have to pay estimated tax if the amount of income tax being withheld from your salary, pension or other income isn’t enough.

If you don’t pay enough through withholding or estimated tax payments, you may be charged a penalty. If you don’t pay enough by the due date of each payment period you may be charged a penalty even if you are due a refund when you file your tax return.

If you are filing as a sole proprietor, partner, S corporation shareholder or self-employed individual, you should use IRS Form 1040-ES, Estimated Tax for Individuals to figure and pay your estimated tax.

Credit for child care

If you paid for child care this summer while the kids were out of school, those expenses may qualify for a tax credit that can save you money on your tax bill.

The Child and Dependent Care Tax Credit is available not only while school’s out for the summer, but also throughout the year. But you must meet certain conditions:

You must pay for care so you — and your spouse if filing jointly — can work or actively look for work. Your spouse meets this test during any month he or she is a full-time student, or is physically or mentally incapable of self-care.

You must have earned income, such as wages and self-employment. If you’re married and filing jointly, your spouse must also have earned income. There’s an exception to this rule for a spouse who is a full-time student or who is physically or mentally incapable of self-care.

You may qualify for the credit whether you pay for care at home, at a day care facility outside the home or at a day camp.

Expenses for overnight camps or summer school tutoring, however, don’t qualify. You can’t include the cost of care provided by your spouse or a person you can claim as your dependent.

Be sure to keep your receipts and records to use when you file your tax return next year. Make sure to note the name, address and Social Security number or employer identification number of the care provider. You must report this information to claim the credit.

Investment losses

Look at any investments that have cost you money and consider selling them before the end of the year to offset investment profits. To parlay capital losses into tax savings, you have to sell your investment and take the loss.

If you incur losses from the sale of investments, you may subtract those losses from your capital gains, which are profits on the sale of investments.

If your capital losses exceed your capital gains, you can deduct only up to $3,000 of those losses in a tax year against ordinary income. Any excess will be carried over until it can be offset against future capital gains or be deducted as a loss against ordinary income, with a limit of $3,000 a year.

Be careful not to go overboard in “harvesting” your investment losses. Make sure you’re not making an investment decision based solely on a tax basis.

Beware of Medicare taxes

This year, higher-income taxpayers may need to factor in more Medicare taxes in tax planning.

Not only will the Medicare tax increase on earned income above certain levels, but a new tax will also be imposed on certain investment income.

The Medicare tax has been 2.9 percent on earned income for the self-employed and 1.45 percent for employees, whose employers pay the other 1.45 percent.

Under the new law, both the self-employed and employees owe an additional 0.9 percent on earnings above $200,000 for singles and $250,000 for joint filers.

Also, if your investment income tops certain thresholds, you may owe a 3.8 percent Medicare tax on the excess.

Home office deduction

The home office deduction has been one of the most complicated tax breaks to figure out. But the Internal Revenue Service wants to make it easier for small business owners to keep records and claim the deduction.

So starting this year, you may use a simplified option when figuring out the deduction.

For example, the simplified method gives you a standard deduction of $5 per square foot of your home used for business, up to 300 square feet. The deduction is capped at $1,500 per year.

With the regular method used to determine the deduction, you have to keep records of such expenses as utilities, rent, mortgage payments and real estate taxes.

How do you determine which method is better for you?

“If a taxpayer typically has a larger home office deduction than the simplified method would allow, they should continue to use actual expenses,” Luscombe said. “Otherwise, the simplified method might be more beneficial.”

Talk to us

> Give us your news tips.

> Send us a letter to the editor.

> More Herald contact information.

More in Business

Black Press Media operates Sound Publishing, the largest community news organization in Washington State with dailies and community news outlets in Alaska.
Black Press Media concludes transition of ownership

Black Press Media, which operates Sound Publishing, completed its sale Monday (March 25), following the formerly announced corporate restructuring.

Maygen Hetherington, executive director of the Historic Downtown Snohomish Association, laughs during an interview in her office on Thursday, Feb. 15, 2024, in Snohomish, Washington. (Ryan Berry / The Herald)
Maygen Hetherington: tireless advocate for the city of Snohomish

Historic Downtown Snohomish Association receives the Opportunity Lives Here award from Economic Alliance.

FILE - Washington Secretary of State Steve Hobbs poses in front of photos of the 15 people who previously held the office on Nov. 22, 2021, after he was sworn in at the Capitol in Olympia, Wash. Hobbs faces several challengers as he runs for election to the office he was appointed to last fall. (AP Photo/Ted S. Warren, File)
Secretary of State Steve Hobbs: ‘I wanted to serve my country’

Hobbs, a former Lake Stevens senator, is the recipient of the Henry M. Jackson Award from Economic Alliance Snohomish County.

Mark Duffy poses for a photo in his office at the Mountain Pacific Bank headquarters on Wednesday, Feb. 14, 2024 in Everett, Washington. (Annie Barker / The Herald)
Mark Duffy: Building a hometown bank; giving kids an opportunity

Mountain Pacific Bank’s founder is the recipient of the Fluke Award from Economic Alliance Snohomish County.

Barb Tolbert poses for a photo at Silver Scoop Ice Cream on Thursday, Feb. 29, 2024 in Arlington, Washington. (Annie Barker / The Herald)
Barb Tolbert: Former mayor piloted Arlington out of economic brink

Tolbert won the Elson S. Floyd Award, honoring a leader who has “created lasting opportunities” for the underserved.

Photo provided by 
Economic Alliance
Economic Alliance presented one of the Washington Rising Stem Awards to Katie Larios, a senior at Mountlake Terrace High School.
Mountlake Terrace High School senior wins state STEM award

Katie Larios was honored at an Economic Alliance gathering: “A champion for other young women of color in STEM.”

The Westwood Rainier is one of the seven ships in the Westwood line. The ships serve ports in the Pacific Northwest and Northeast Asia. (Photo provided by Swire Shipping)
Westwood Shipping Lines, an Everett mainstay, has new name

The four green-hulled Westwood vessels will keep their names, but the ships will display the Swire Shipping flag.

A Keyport ship docked at Lake Union in Seattle in June 2018. The ship spends most of the year in Alaska harvesting Golden King crab in the Bering Sea. During the summer it ties up for maintenance and repairs at Lake Union. (Keyport LLC)
In crabbers’ turbulent moment, Edmonds seafood processor ‘saved our season’

When a processing plant in Alaska closed, Edmonds-based business Keyport stepped up to solve a “no-win situation.”

Angela Harris, Executive Director of the Port of Edmonds, stands at the port’s marina on Wednesday, Jan. 24, 2024, in Edmonds, Washington. (Ryan Berry / The Herald)
Leadership, love for the Port of Edmonds got exec the job

Shoring up an aging seawall is the first order of business for Angela Harris, the first woman to lead the Edmonds port.

The Cascade Warbirds fly over Naval Station Everett. (Sue Misao / The Herald file)
Bothell High School senior awarded $2,500 to keep on flying

Cascade Warbirds scholarship helps students 16-21 continue flight training and earn a private pilot’s certificate.

Rachel Gardner, the owner of Musicology Co., a new music boutique record store on Thursday, Jan. 18, 2024 in Edmonds, Washington. Musicology Co. will open in February, selling used and new vinyl, CDs and other music-related merchandise. (Olivia Vanni / The Herald)
New Edmonds record shop intends to be a ‘destination for every musician’

Rachel Gardner opened Musicology Co. this month, filling a record store gap in Edmonds.

MyMyToyStore.com owner Tom Harrison at his brick and mortar storefront on Tuesday, Sept. 6, 2022 in Everett, Washington. (Olivia Vanni / The Herald)
Burst pipe permanently closes downtown Everett toy store

After a pipe flooded the store, MyMyToystore in downtown Everett closed. Owner Tom Harrison is already on to his next venture.

Support local journalism

If you value local news, make a gift now to support the trusted journalism you get in The Daily Herald. Donations processed in this system are not tax deductible.