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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