Archive for December, 2012

Smart Financial Moves for Late 2012 and Early 2013

December 5, 2012

As major corporations are doing, small business leaders are preparing for changes in 2013 tax laws.

Large corporations are rushing to pay dividends in 2012 in anticipation of tax increases in 2013.

For small business owners and others, there are actions that can be taken before the end of the year to lessen whatever new tax burdens are imposed.

Here are some ways of avoiding higher taxes next year:

Make a charitable gift before New Year’s Day. Claim the deduction on 2012 return, provided Schedule A is used. The paper trail is important here as is the valuation of any stock or other real property donation. Be sure the charity is eligible to receive charitable gifts by going to
Contribute more to a retirement plan. If not yet 70½ and participate in a traditional (i.e., non-Roth) qualified retirement plan or have a traditional IRA, it is possible to reduce 2012 taxable income by the amount of the contribution. Also, keep in mind that the 2012 tax year contribution to an IRA or solo 401(k) may be made as late as April 15, 2013 (or October 15, 2013 if you file Form 4868).
In 2012, the contribution can be up to $17,000 in a 401(k), 403(b) or profit-sharing plan, with a $5,500 catch-up contribution also allowed if age 50 or older. An individual can put up to $11,500 in a SIMPLE IRA in 2012, $14,000 if you are 50 or older.
Make a capital purchase. If a business purchases assets that have a useful life of more than one year – a truck, a computer, furniture, a rototiller, whatever – those purchases are commonly characterized as capital expenses. For 2012, the Section 179 deduction can be as much as $139,000 (although it is ultimately limited to net taxable business income). First-year bonus depreciation is set at 50% for most purchases of new equipment and software in 2012. 2013 deductions may be much less generous.
Open an HSA. By establishing and funding a Health Savings Account in 2012, it is possible to make fully deductible HSA contributions of up to $3,100 (singles) or $6,250 (married couples). A catch up contribution ($1,000) is allowed if 55 or older.
Practice tax loss harvesting. Sell underperforming stocks in a portfolio – enough to rack up at least $3,000 in capital losses. If it ends up that total capital losses top all of the capital gains in 2012, up to $3,000 of capital losses can be deducted from 2012 ordinary income. If there are over $3,000 in capital losses, the excess rolls over into 2013.
Pay attention to dividends and capital gains. Next year, dividend income is slated to be taxed as regular income. So tax on qualified stock dividends could nearly triple for the wealthiest Americans.
Capital gains taxes for high earners are scheduled to jump 33% in 2013. Long-term capital gains are now taxed at 15% for those in the highest four income brackets; that rate is supposed to rise to 20% next year.
Should a maximum contribution to IRA be made on January 1? The rationale behind this is that the sooner a contribution is made, the more interest those assets will earn. 2012 IRA contribution can be made until April 15, 2013.
In 2012 up to $5,000 contribution can be made to a Roth or traditional IRA if age 49 or younger, and up to $6,000 age 50 and older (though an individuals MAGI (modified adjusted gross income) may affect how much can be put into a Roth IRA).
What are the income limits on tax deductions for traditional IRA contribution? If an individual participates in a workplace retirement plan, the 2012 MAGI phase-out ranges are $58,000-$68,000 for singles and heads of households and $92,000-$112,000 for couples.
Should you go Roth before 2013 gets here? It is expected federal taxes are poised to rise next year, but one little detail isn’t getting enough publicity: the planned 3.8% Medicare surtax scheduled to hit single/joint filers with AGIs (adjusted gross incomes) over $200,000/$250,000 will not apply to qualified payouts from Roth accounts.
MAGI phase-out limits affect Roth IRA contributions. In 2012, phase-outs kick in at $173,000 for joint filers and $110,000 for single filers. Should a MAGI score prevent contributing to a Roth IRA at all, an individual still has a chance to contribute to a traditional IRA in 2012 and then roll those assets over into a Roth.
Consult a tax or financial professional before making any IRA moves to see how it may affect an individuals overall financial picture. If an individual has a large traditional IRA, the projected tax resulting from the conversion may make this a negative option.
With a little planning and timely action you can save on your tax bill.