Saturday, December 15, 2012

Fiscal cliff or not, make these tax moves now

7 hrs.

Tax planning for many people has devolved into one big guessing game this year as Washington battles over tax policy. Everything from payroll taxes to capital gains tax rates is still up in the air. But there are ways to play the odds, and some moves to make regardless of what Washington does.?

Here are five actions to consider in the final weeks of 2012:?

1.?Shift your deductions?

The general rule for year-end tax planning is to move as many deductions as you can (from real estate taxes, for example) into the current year, while postponing as much income as possible into the next. Why pay taxes earlier than necessary, after all? For most taxpayers, that's likely still good strategy. You can do this by paying your year-end tax bill and mortgage payments a few days early, accelerating next semester's tuition payments into this year and more.?

But wealthy taxpayers need to weigh both potentially higher rates next year - which argue for pushing deductions out - and the possibility of limits on deductions, which could put a damper on the value of those deductions going forward. If you're considering a big move in the waning days of 2012, it's worth asking your accountant to run the numbers.?

2.?Feed your retirement plan?

The maximum you can contribute to an Individual Retirement Account (IRA) is $5,000 (or $6,000 if you're 50 or older). You can exempt contributions from your taxable income, unless you are covered by a retirement plan at work, and are a high earner. That break phases out for covered single workers earning between $58,000 and $68,000 (between $92,000 and $112,000 for joint filers.)?

If you're above those income limits, you can still fund a non-deductible IRA. That gives you the ability to defer taxes on the account's earnings until you withdraw them in retirement -- and offers a back door way for high income earners to move money into a tax-favored Roth IRA.?

The growing numbers of self-employed workers have a special retirement plan: the so-called SEP-IRA. The maximum you can contribute to a SEP-IRA is 25 percent of your income, up to $50,000. To see how much you can personally set aside in a SEP-IRA, use a calculator, such as this one from Fidelity Investments (http://tinyurl.com/bj4x5j3). While there may be investment advantages to making contributions before year-end, there's no compelling tax reason to rush: You can make retirement contributions for 2012 until next April.?

3.?Convert your IRA into a Roth?

With a traditional IRA, you defer the tax hit until you make withdrawals in retirement. In contrast, you make after-tax contributions to a Roth IRA, but then don't owe any income tax later when the money is withdrawn. This can convey great benefits for younger savers in particular; the lack of income taxes on income that compounds for years can be significant.?

If you roll over a traditional IRA to a Roth now, you'll owe those taxes with your 2012 tax return; make sure you can pay those taxes without using your retirement funds. Not sure if a Roth is the right plan for you? A Roth IRA calculator, such as this one from Charles Schwab Corp. (http://tinyurl.com/6uwcnpz), can help you decide.?

There are income limitations for contributing to Roth IRAs, but high earners who make too much to qualify can contribute to nondeductible traditional IRAs and then convert them to Roth IRAs.?

4.?Be charitable?

Regardless of what happens in Washington, charitable donations are valuable this year as a tax deduction, and -- for wealthier taxpayers and those worried about higher estate and gift taxes next year -- as a way of getting money out of taxable estates. To claim the deduction, you need to itemize your deductions when you file your return, and you need to make sure you give to a qualified nonprofit organization. If the fiscal cliff solution cuts the write-off for charitable donations next year, your dollars will go further by giving now.?

"I have every wealthy client I represent setting up a donor-advised fund and funding it with $100 or $1,000. At the end of the month, we can fund it if we are going to lose our charitable deductions next year," says Robert Keebler, a partner at Keebler & Associates, a tax and estate planning firm in Green Bay, Wisconsin.?

5.?Sell winners, probably?

The typical year-end strategy calls for harvesting capital losses in order to offset capital gains. After all, you can match capital losses against capital gains to reduce or eliminate the gains tax you'll owe, and even take an additional $3,000 net capital loss against ordinary income. But the current 15 percent tax rate on capital gains is likely to rise to 20 percent next year, and high-income investors will also have a 3.8 percent Medicare tax to pay on top of that. So it may make more sense to take gains now while rates are low. "If you are sitting on some capital gains, now might be a good time to cash in," says Bob Meighan, a certified public accountant and vice president at TurboTax. "Rates are at historic lows."?

Source: http://www.nbcnews.com/business/fiscal-cliff-or-not-make-these-tax-moves-now-1C7608707

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