Year End Tax Saving Strategies
Year End Tax Saving Strategies
As year-end is approaching, here are some tax saving strategies that I would like to share with you:
Increasing Income:
Usually, high-income earners want to delay receiving discretionary income, like year-end bonuses, if tax rates are expected to stay the same or decrease. However, in 2013, the tax rates will increase. The current top tax brackets of 25%, 28%, 33% and 35% will be replaced by 28%, 31%, 36% and 39.6%. Additionally, the 10% tax bracket will disappear and be replaced by the 15% bracket. Taxpayers will pay an additional 0.9% Medicare tax on income from wages over $200,000 ($250,000 for married couples). If you could be affected by this tax increase, then it may make sense for you to accelerate the discretionary income and receive it in 2012 to avoid this higher tax in 2013.
Maximize Tax-Deferred Retirement Plan Contributions:
For 2012, you can contribute up to $17,000 to your 401(k) or other employer-based plan. For those people 50 or older, the limit is $22,500.
For a regular IRA, the maximum allowable contribution is $5,000 ($6,000 for people 50 or older), and the 2012 contribution deadline is April 15, 2013. Contributions to a traditional IRA could be tax-deductible as well if you meet the qualifying criteria.
Contributing the maximum amounts to your 401(k) plan and deductible IRA will help to lower your taxable income and build up your savings for retirement.
Harvest Your Capital Gains:
For 2012, the long-term capital gains tax rate is 15%. That rate will increase to 20% for 2013 under current tax laws. Even if Congress passes legislation so that the long-term capital gains tax rate stays the same for 2013, the new 3.8% surtax on unearned income (to fund the health care reform law) will cause long-term capital gains to be taxed at 18.8%. So if you have appreciated assets or stocks that you will sell in 2013, it may be more advantageous to make those sales in 2012.
Increase Itemized Deductions:
Under the current tax laws for 2013, higher income taxpayers may see their itemized deductions reduced, when a previous tax law gets reinstated. Under that old law, up to 80% of itemized deductions may be reduced, depending on income levels.
So depending on your situation, it may make sense to pay more deductible expenses in 2012 that you would have paid in 2013 anyway. For instance, paying some of the following items by the end of 2012 instead of in 2013 could help increase your allowable itemized deductions for 2012:
· Estimated state tax payments
· Real estate taxes
· Personal property taxes
· Foreign income taxes
· An additional mortgage payment (for principal and interest)
· Charitable contributions
Note: This strategy may not be helpful if the alternative minimum tax is an issue for you in 2012.
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