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Tips For Coping With New Tax Rules (INVESTOR'S BUSINESS DAILY)

With tax season under way, you're scratching your head, trying to figure out how to cope with higher levies facing taxpayers on 2013 returns and how to plan for 2014.

One key to tackling this problem is to think of the new rules as different aspects of the same challenge. The taxes differ from one another, and higher tax rates kick in at various income thresholds. But the solution is the same for several of them.

•The new top income tax bracket of 39.6%, up from 35%, hits taxpayers with more than $400,000 of taxable income and marrieds filing jointly with taxable income over $450,000.

•The same thresholds apply to the new, higher 20% tax on capital gains and qualified dividends.

•Phaseout of itemized deductions and of eligibility for the new, higher $3,900 personal exemption starts at $300,000 for marrieds, $250,000 for singles.

"Managing those means managing taxable income," said Keith Hall, president and national tax adviser for the National Association for the Self-Employed. "All you must do is get $1 below the threshold for any bracket to save tax dollars."

One way to do that is by deferring optional income, such as a voluntary IRA or 401(k) withdrawal or pension distribution.

Another approach is to replace taxable income with tax-exempt, whenever practical and whenever it makes investment sense too. "It's too late for 2013, but it's the right time to plan for 2014," said Sandy Botkin, author of "Lower Your Taxes Big Time."

Consider boosting your stake in municipal bonds and funds, trimming your exposure to taxables.

And when you sell an asset, consider taking payment in installments rather than all at once, Botkin says. "That can cut the amount of income in any one year," he added.

Yet another tactic, which you can still use for your 2013 return, is to kick in enough to a retirement plan whose tax-deductible contribution deadline has not arrived yet. For a traditional IRA, that's April 15.

The 2013 and 2014 contribution cap for an IRA is $5,500 plus $1,000 if you are 50 or older.

That won't help with the new 39.6% bracket. Eligibility for 2013 deductibility ends at $69,000 of income for a single filer and $115,000 for married joint filers. That's way below the 39.6% bracket threshold.

But deductible retirement plan contributions can still get you below other lower bracket thresholds.

And if you have self-employment income, consider contributing to a SEP-IRA. This could help you avoid that 39.6% bracket.

Suppose you earn $500,000 as a consultant. You'd be eligible to contribute up to $51,000 to a SEP-IRA. "In the 39.6% bracket, that could save you about $20,000 in taxes," Hall said.

For a SEP-IRA, you can contribute until the date you file your return, including any extension.

Medicare Surtax

There's also a new 3.8% Medicare surtax on net investment income, which hits marrieds with modified adjusted gross income over $250,000, $200,000 for singles.

Keep your AGI down by avoiding such moves as converting a traditional IRA to a Roth IRA, says Jackie Perlman, tax analyst for the Tax Institute of H&R Block.

Also, consider shifting to tax-exempt interest from taxable. And when it also makes strategic sense, harvest losses to offset gains.

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