Don and I had dinner with a newly-widowed friend last week. She has a great job and, fortunately, she and her husband were excellent financial planners, so that gives her some degree of comfort during a very stressful time.
But the shock of her husband’s death was just beginning to settle in when her financial advisor threw her into another tailspin: Beginning next year, she’s going to be paying more money in taxes now that she is “newly single”! It’s not something that had even crossed her mind, but it will cost her quite a bit, unless she takes some steps to minimize 2012’s tax bite.
Thankfully, she has a good financial planner! And while many of us do consult financial advisors, many more folks are self-advised. That means that you have to take charge and make the right moves to prepare your finances for the year ahead.
And as I said in last week’s column on financial fitness http://nancyzsmoneymarketplace.blogspot.com/2011/12/take-charge-of-your-financial-future.html, “planning is the key” to financial fitness. And planning to minimize your tax outlay is one of the most important strategies you can put to work to maximize your money.
As you know, Congress is still fighting about extending the payroll tax break that is due to expire at the end of this year. Should that occur, the average tax payer is going to give Uncle Sam an extra $934 in 2012. And while we know what our tax rates will be for this and next year, they are due to change in 2013—for the worse—unless Congress makes some alterations to the tax code.
With that in mind, it will pay you big dividends to take the time, right now, to do a bit of tax planning.
There are three primary steps in end-of-the-year tax planning:
· Defer income
· Accelerate deductions
· Take advantage of expiring tax provisions
Let’s take them one-by-one.
Techniques for Deferring Income
1. If you are one of the lucky people who are due a bonus this year, ask your boss to pay it to you in January 2012, instead of this month.
2. Don’t take any IRA/retirement distributions until next year, but don’t put them off until 2013 as ordinary income tax rates are slated to be higher then
3. Hold onto stocks with capital gains and sell them in 2012 (the long-term capital gains rate is scheduled to increase to as much as 20% after next year).
Strategies for Accelerating Deductions
1. Make sure you round up and pay as many tax deductible expenses as you can find in 20111. Those may include medical bills, charity donations and property tax. Sell off losing stocks and other investments to lock-in your losses in 2011.
2. Add to your 401(k) or IRA (most folks can contribute up to $5,000 for 2011)
3. Consider converting your pre-tax retirement IRA to a Roth IRA to take the hit now before tax rates increase.
4. Maximize your charitable deductions to do “good” as well as relieve your tax burden.
5. Make an early gift to your heirs. This year, you can gift up to $13,000 per recipient.
Expiring Tax Provisions
1. You may also want to deduct classroom expenses for teachers, mortgage insurance premiums, sales taxes, and tuition deductions, which are all expiring at the end of this year.
2. The gift tax exemption is $5 million for 2011, with a maximum estate tax of 35%. In 2013, the exemption reverts back to $1 million, with a maximum estate tax of 55%.
And one more thing…
If you own a business, you’ll want to know about these three strategies that can help you donate less to Uncle Sam this year:
Small Business Owners/Self-Employed Persons
1. You’re going to get a double whammy in 2013. The self-employment tax rate (13.3% for 2011) will revert back to the normal 15.3% rate next year. Additionally, the wage base for Social Security is increasing to $106,800, which means that all of us who are self-employed will be paying higher self-employment taxes in 2012. For us, 2011 is a good time to maximize our income so that we minimize our tax bite.
2. If you are in the market for a big equipment purchase, the 2011 tax code gives you the ability for “bonus” depreciation, allowing business owners to write off 100% of depreciation this year. It goes to 50% next year.
3. Enhanced deductions for food inventory, book inventory to public schools, and computer inventory for educational purposes are extended through this year, although the rules are complicated, so make sure you consult your tax advisor.
These are just a few techniques and strategies to help you keep more of your money, so that you can put it to work to grow toward your nest egg. But remember, you should always consult your professional tax advisor/accountant/attorney before making any major changes to your tax planning.
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