Along with pumpkin pie and gifts, ’tis also the season for early tax planning. April might seem far away, but the end of 2012 marks your last chance to score some tax write-offs. Check out these tips to make for a fatter wallet come spring.
What follows are some financial considerations you should review with your spouse. As always, it’s best to consult a financial professional familiar with your personal situation. This year they will definitely be earning their keep.
Keep Accurate, Up-to-Date Records – Keeping financial records is one of those good money habits that help to make sound choices. These decisions don’t exist in a vacuum. Whether it’s in a spreadsheet, software or online app, your financial information needs to be updated in order to make timely decisions before year-end.
Claim Your American Opportunity Credit – Originally set to end in 2010, the American Opportunity credit was extended through 2012. This tax break provides credit for a maximum of $2,500 of qualified tuition and related expenses. This is one of those tax breaks that could expire at year end as Congress looks for easy ways to cut the federal deficit. Claim your eligible education expenses while you can.
Rollover Your Traditional IRA to a Roth IRA – If you’ve been planning to convert your traditional IRA to a ROTH IRA, consider getting it done before the year ends. The rate on the rollover’s taxable portion is set to increase from 35 percent to 39.6 percent in the New Year. The difference of a few weeks could amount to a substantial sum.
Advance Your Income -Assuming Congress does nothing, the top ordinary income tax bracket is set to increase from 35 percent to 39.6 in 2013. If you’re in this situation and can control the flow of income, it may make sense to advance your income into 2012 so that you are taxed at this year’s lower rate.
Delay Spending – Unless you can find a way to reduce your income by about 5 percent, you’ll be paying more tax in 2013, assuming you’re in the same tax bracket. Working in tandem with income advancement, a delay in spending could also work to your advantage should tax rates increase next year.
Sell Your Winners – Common wisdom dictates that you should never make an investment decision based solely on tax implications. However, it’s important to realize that the long-term capital gains rate is set to increase from a maximum of 15 percent to 23.8 percent in 2013. That’s an increase of about 50 percent! If you’re fortunate enough to have a star or two in your portfolio that you’re thinking of selling, think hard and fast. There are only a few weeks left until year-end.
Hold Your Losers – Every stock portfolio has stragglers and some straggle more than others. Many investors traditionally sell losing investments towards year-end in order to reduce capital gains. This year it may make sense to hold on a little longer. If the long-term capital gains rate increases next year, as many pundits expect, then those losses will have more value if they are taken in 2013.
Give Big Gifts – If you’re in the fortunate position where you’re estate is worth over $1 million, talk with an estate tax adviser now. The current $5 million estate exclusion falls to $1 million on New Year’s Day, 2013. Estates larger than that amount will be taxed at 55 percent. One million dollars sounds like a lot but, according to Trulia, the median price for a home sold in New York City between August and October 2012 was $1,075,000.
Give Small Gifts, Too – If you plan on giving your estate away, while you’re still around to see the benefits, remember that in 2012 you can give up to $13,000 each to an unlimited number of individuals. There’s no tax cost to you or the recipients.