2012 Year End Tax Planning - The Time to Act is Now!

With the fiscal cliff looming, year-end tax planning is even more difficult in 2012 than ever before. "Will they or won't they" is the question being asked of Congress.  "Who knows" is my answer right now.  

While you can't do anything about Congress, you do still have time to take a look at what your tax bill might be for 2012.  

  •  Consider the amount you set aside in your employer's health flexible spending account (FSA). Starting in 2013, the maximum contribution to a health FSA will be reduced to $2,500, and you get reimbursements for over-the-counter medications.
  • If you have a health savings account (HSA) consider making a full year's worth of HSA contributions if you haven’t maxed out.  If you have an HSA, contributions are deductible, earnings are tax-deferred, and distributions are tax free for qualifying medical expenses.
  • If you are already thinking of selling assets that are likely to yield large gains because of a low cost basis, try to make the sale before year-end (considering market conditions).  The 2012 long-term capital gains rate ia a maximum of 15%, but it’s scheduled to rise to 20% in 2013. Also, if your adjusted gross income exceeds certain limits $250,000 for joint filers/$125,000 for a married individual filing a separate return/$200,000 for a single person, gains in 2013 might trigger an extra 3.8% tax (the so-called “unearned income Medicare contribution tax”).
  • You can lock in capital gains of 15% on stock you think still has plenty of room to grow by selling it and then repurchasing it. You will owe federal capital gains tax at 15%, but have a higher cost basis against any future sales at a potentially higher capital gains rate and 3.8% Medicare tax.
  • Look at contributing to Roth IRAs instead of traditional IRAs. While not tax deductible when made, Roth IRA payouts are tax-free and thus immune from the threat of higher tax rates, as long as they are made (1) after a five-year period, and (2) on or attaining age 59-½, after death or disability, or (3) for a first-time home purchase.  Also, you can look at converting a traditional IRA to a Roth.  You will need to pay taxes on the amount converted, but that might be a lower number if income tax rates go up.
  • Don’t forget to take required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retired plan) if you have reached age 70-½.
  • For 2012, unreimbursed medical expenses are deductible to the extent they exceed 7.5% of your AGI.  However, starting in 2013, if you are under age 65, these expenses will be deductible only to the extent they exceed 10% of AGI. If you have a shot at exceeding the 7.5% this year, try to accelerate any costs you will need to pay next year into this year.
  • Pay state and local income taxes due April 2013 in 2012 so you can deduct them from this year’s tax return.
  • Try to settle an insurance or damage claim in order to maximize your casualty loss deduction this year.
  • Make annual exclusion gifts of up to $13,000 per beneficiary.

Image courtesy of [Idea Go] / FreeDigitalPhotos.net

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