With just over one month left until 2012 becomes 2013, people can take a number of savvy moves that help them lower their taxes in the new year. To help, Bill Losey, a retirement coach and certified financial planner offers the following tips to help financially prepare you for the new year.
Make a charitable gift before New Year’s Day— You can claim the deduction on your 2012 return, provided you use Schedule A. The paper trail is important here.
If you give cash, you need to document it. Even small contributions need to be demonstrated by a bank record, payroll deduction record, credit card statement, or written communication from the charity with the date and amount. Incidentally, the IRS does not equate a pledge with a donation. If you pledge $2,000 to a charity in December but only end up gifting $500 before 2012 ends, you can only deduct $500.
Does the value of your gift exceed $250? It may, and if you gift that amount or larger to a qualified charitable organization, you will need a receipt or a detailed verification form from the charity. You also have to file Form 8283 when your total deduction for non-cash contributions or property in a year exceeds $500.
If you aren’t sure if an organization is eligible to receive charitable gifts, check it out at the IRS website.
Contribute more to your retirement plan— If you haven’t turned 70½ and you participate in a traditional (i.e., non-Roth) qualified retirement plan or have a traditional IRA, you can reduce your 2012 taxable income by the amount of your contribution. If you are self-employed and don’t have a solo 401(k), a SIMPLE plan or something similar, consider establishing and funding one before the end of the year. Also, keep in mind that your 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).
Make a capital purchase— If you buy assets for your business 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 your net taxable business income). First-year bonus depreciation is set at 50 percent for most purchases of new equipment and software in 2012. The way it looks now, the 2013 deductions may be much less generous.
Open a health savings account (HAS)— If you work for yourself or have a very small business, you may pay for your own health coverage. By establishing and funding a HAS in 2012, you could make fully deductible HSA contributions of up to $3,100 (singles) or $6,250 (married couples). Catch up contributions are allowed if you are 50 or older.
Practice tax loss harvesting— You could sell underperforming stocks in your portfolio – enough to rack up at least $3,000 in capital losses. If it ends up that your total capital losses top all of your capital gains in 2012, you can deduct up to $3,000 of capital losses from your 2012 ordinary income. If you have over $3,000 in capital losses, the excess rolls over into 2013.
Pay attention to asset location— 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 percent in 2013. Long-term capital gains are now taxed at 15 percent for those in the highest four income brackets; that rate is supposed to rise to 20 percent next year.