Year-end Tax Planning Tips

by Krantcents · 21 comments

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Are you doing year-end tax planning?  If not, be prepared to pay more in taxes!  As a former Chief Financial Officer (CFO), I routinely did year-end tax planning for the companies I worked for.  Along with our accounting firm, we took a proactive role in reducing our taxes.  A little tax planning can save you a substantial amount of money!  What are you doing?

Tax Changes are Coming

I expect there will be changes in the taxes next year!  How will these changes affect you and how can you avoid some of the pitfalls?  If Congress does nothing, your taxes will increase.  What should you do?  If you earn more than $200,000 ($250,000 for couples), you can expect an increase because there will be changes in allowable tax deductions.  In these uncertain times, we do not know what changes will actually occur.  You could wait and do nothing or take action based on your current tax liability.

We expect changes particularly for people who earn more than $200,000 ($250,000 for couples) and some changes for others who actually earn less.  In a perfect world, the people who earn less than these thresholds should see no increase, but I think it is unlikely.  For example, capital gains will increase from 15% to 20%.  If Congress just lets the Bush tax cuts expire, you will see an increase.  What should you do?  First, do what makes sense versus tax savings.

Increase Income

What is your tax strategy?  I would want to report income under the lower tax rates of 2012 and defer deductions for the future higher tax years.  The problem in that thinking is some of those deductions are unknown.  For higher income earners, there is a strong probability of capping or limiting deductions.  This may be a good year to convert retirement accounts to Roth IRAs.  It will lower your future tax liability and take the income in a lower tax year.  This may make sense for those of you who expect to be in a higher tax bracket.

You definitely want to increase your income in 2012.  Take bonus distributions in 2012; sell appreciated assets such as investments to use the lower capital gains rate.  You can also give appreciated assets to your children who are generally in a lower tax rate than you.  It is not too late to make additional contributions to your 401K, IRA and Roth IRA.  Increase your income and lower your income at the same time.  By lowering your income by distributing your appreciated assets or adding to your retirement accounts, you can convert your IRAs to a Roth IRA.

This is the year to take long term capital gains because the capital gains tax rate may increase next year.  You can only deduct up to $3,000 of long and short term capital losses.  The remaining net capital losses will have to be carried over to future years.  If the Bush tax cuts expire, the capital gains tax rate will increase from 15% to 20%.  Nothing is assured except the lower rate for the current year.  What will you do?

This may be the best year to sell your primary residence.  Currently, there is an exclusion of $250,000 ($500.000 if married) of income on the sale of your home.  You had to live in your home for at least two (2) years out of the last five (5) years. Could this change in the future, it is unknown.  Congress is looking at everything and you have to make decisions based on what you know right now.  What will you do?

2013 and Beyond

I cannot predict what changes will be made, but I can take steps that will help no matter what changes are made.  Take advantage of existing programs to lower your income.  You can either find more deductions or shift your income.  You can lower your adjusted gross income (AGI) by increasing your contribution to 401K or IRA.  You should also take advantage of a 457 or some other way of deferring income tax free.

You can use flexible spending accounts (FSA) for healthcare and dependent care expenses.  Of course there are limitations, but you can contribute up to $2,500 for a healthcare FSA and $5,000 for dependent care FSA per year.  You are contributing pretax money to pay for medical and dependent care expenses.  The only negative is you must use the money for qualified expenses or lose it.  Without a FSA, you must meet threshold requirements before medical expenses are deductible.

Other deductible expenses may change, but you can lower income by increasing your contributions to your retirement and healthcare accounts.  If you do not own a home, you can increase your deductions by buying a home.  Interest rates and home values are at their lowest point in years.  You still need to find the right home at the right price that meets your needs, but it may make sense for you.  You can start or expand your business.  You can even buy a home and rent it out!

Final Thoughts

Whether you accelerate your income for 2012 or delay expenses from 2012 into 2013, you need to take action.  I offered a number of tax ideas that I have or will use to lower my tax liability.  In these changing times, you have to make decisions and sometimes it is not very clear what you can do.  One thing is very clear, if you do nothing, you will pay higher taxes in the future.   I love taxes, but I want to pay less  How about you?  What year-end tax planning are you doing?

The information contained on my website is intended to inform and it is not intended nor should it be used as a substitute for tax, accounting, investment, consulting or other professional advice.  You should always seek advice from your tax professional for your particular situation.

Photo by:  mullica

What year-end tax planning are you doing?


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Money Beagle November 27, 2012 at 6:15 am

At a certain point our mortgage interest, real estate, state tax and charitable contributions will no longer exceed the standard deduction, probably in the next year or so. My tax advisor has told us that we can make our January mortgage payment in December and also pay the winter tax bill in December, which will put us over the limit every other year for at least a couple of more cycles. I need to determine if that makes sense to do that this year or if I’m safe for another year.

Krantcents November 27, 2012 at 7:44 am

I have done that for years, but it only really affects the first year. I will probably use the standard deduction fairly soon (within 5 years) too.

Lance @ Money Life and More November 27, 2012 at 6:54 am

I might sell some investments that I am looking to change my risk exposure on and definitely plan to do some business tax planning fun.

Krantcents November 27, 2012 at 7:49 am

Now is a good time for planning and making the appropriate changes.

Darwin's Money November 27, 2012 at 7:13 am

The gaming of the FSA is certainly something I always make sure to hit at the end of the year. Outside of tax issues, I even made sure to have an elective surgery THIS year since our family already maxed out the $500 deductible for my health insurance, rather than doing it next year and having to hit that cap again before going into the 90/10 payments. A few hundred here, hundred there adds up over time!

Krantcents November 27, 2012 at 8:35 am

A little planning does wonders when it comes to something like this! I usually review my current medical expenses during open enrollment and project what I need to spend for the new year.

Brick By Brick Investing | Marvin November 27, 2012 at 9:19 am

The taxes coming in 2013 are going to be absolutely ridiculous! (sorry to rant) With that said we plan on maxing out our FSA for medical. Unfortunately we will lose the daycare FSA because my wife no longer works. Taxes is one of those things that I absolutely hate but I due my homework on them implement certain strategies it’s worth it. On a side note, how do you feel about a flat tax? Say 20% across the board?

Krantcents November 27, 2012 at 11:44 am

I have no confidence in Congress to fix the tax system! I always did what I needed to reduce my taxes.

Brent Pittman November 27, 2012 at 1:06 pm

I’m considering additions to HSA, ESA, and 529…that is if I can find the spare change hidden in the couch.

Krantcents November 27, 2012 at 1:22 pm

There is nothing wrong increasing those contributions by $5-10. An increase is an increase.

AverageJoe November 27, 2012 at 3:05 pm

Fantastic tips. I don’t think you have to be a betting man to see that tax rates probably aren’t going to decrease.

Krantcents November 27, 2012 at 3:59 pm

Whether the rates are increased or deductions reduced, taxes are going up for sure! Time to take action before they do it to you again..

Jeremy Noel Johnson November 27, 2012 at 3:55 pm

Lots of good detail in here. To start with my end of year planning, I’m just trying to make sense of the different income’s I’ve had come in this year.

This is the first year I’ve had substantial income outside of my day job, mostly with capital gains, but my wife is also starting to earn about $500 a month with her side business, so a lot if just understanding what all is coming in and categorizing it.

After that, I’ll have to see what makes sense then – it’s a lot to think about, but a nice problem to have with multiple income sources. Now if I could just lock in some good real estate to rent out :)

Krantcents November 27, 2012 at 4:53 pm

Rental property was my first outside income and it became a great business for me. It is still a good source as well as others. Make sure you talk to a tax professional regarding what expenses are appropriate for you r businesses.

BlueTax December 10, 2012 at 2:04 pm

Thanks for the year-end planning tips. Being prepared for the changes will probably help save a lot of time.

Krantcents December 10, 2012 at 2:44 pm

Aside from IRAs (regular & Roth) you must take any deduction in the calendar year to write it off. Planning is everything.

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