Tax planning is an essential part of financial planning.
With all of the talk about the fiscal cliff dominating the headlines, it’s important to remember that there’s still some time left before this year’s tax laws expire.
Here are a few tips that may help to make filing your 2012 tax return a little less painful:
* Note: Consultation with your tax advisor before implementing any tax strategy is always recommended.
[toggle title=”1) Review your withholdings/quarterly estimated payments…”]
Review your withholdings/quarterly estimated payments to gauge whether you are on track to avoid a big surprise. Income that is not typically subject to withholding – such as capital gains, dividends and interest – should be considered when projecting your tax bill.
If necessary you may want to consider making an additional or increased estimated payment to mitigate the impact of any underpayment penalty. Review the requirements for safe harbor to avoid underpayment penalty.
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[toggle title=”2) If you are on Medicare, you need to be aware of…”]
If you are on Medicare, you need to be aware of the AGI limits that will trigger an additional premium cost. Individuals with an MAGI over $85k and MFJ with MAGI over $170K are subject to an additional $40/month for Part B and $11.60/month for part D.
If you are close to the limit, a strategy to consider is using a debt account to fund immediate cash needs and draw from IRA in January to pay it off.
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[toggle title=”3) Accelerating income into 2012 should be considered…”]
Accelerating income into 2012 should be considered, especially for high incomers. In particular, capital gain income may be the low hanging fruit to bring into 2012. Current tax rates are capped at 15% for long-term gains and may be even lower for some tax payers.
It’s possible that capital gains rates are going to go higher, but they won’t be lower. If your income is likely to be above $250k going forward you should consider taking some capital gains before year end.
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[toggle title=”4) Strategy for maximizing deductions is a little more complicated…”]
Strategy for maximizing deductions is a little more complicated this year. Negotiations in Washington are including the possibility of limiting the amount of deductions that are available to itemizers. The medical deduction currently available for costs over 7.5% of AGI is already going to 10% of AGI in 2013 for taxpayers under age 65.
It’s likely that there will be more restrictions to deductions coming, so taking deductions in 2012 may be a better bet regardless of income level next year.
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[toggle title=”5) Charitable gifts to a qualified charity of appreciated…”]
Charitable gifts to a qualified charity of appreciated stock can be a win-win. You get to take a deduction for the market value of the stock, and you don’t have to recognize any gain subject to tax.
Make sure the stock has been held for more than a year as only long term capital assets can qualify for the step up to FMV.
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[toggle title=”6) Taking full advantage of low tax brackets is essential…”]
Taking full advantage of low tax brackets is essential for keeping your lifetime tax bill as low as possible. A Roth conversion is an effective tool for managing income recognition as well as creating tax-free growth.
For the amount you will be converting, the main consideration is whether you are likely to be in a higher bracket in the future than you are today. Also, if you decide that you want to undo the conversion there is an option to recharacterize back into the pretax account before you file your return.
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[toggle title=”7) If you are covered by a high deductible health plan you may…”]
If you are covered by a high deductible health plan you may be eligible to contribute to a health savings account. You can contribute up to $6,250 for family coverage or $3,100 for self-only into the HSA account if your HDHP meets requirements.
If your employer contributes to your HSA but less than the maximum allowed you can contribute the difference by the due date of your return. You don’t need qualifying medical expenses to make the contribution but you must reduce the amount of your deduction by any qualifying distributions taken.
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Photo credit: Alan Cleaver
