Saving Taxes

Year-end tax planning is usually stressful, but this year is especially anything but ordinary. Unless Congress acts before December 31, tax rates on wages and investments will rise, the exemption from the estate tax will shrink and dozens of tax breaks will disappear. If that happens, many more Americans will pay higher taxes next year. The average household’s tax bill will increase by about $ 3,500 – and that’s average!

The most likely scenario is that Congress will kick the can down the road again by some sort of extension of the current tax situation. That’s what they did two years ago and now we find ourselves in the exact same situation. No solution – just delay.

If you think your tax bill will rise in the future, you may consider converting some of your IRA money to a ROTH. Of course, that’s assuming that you trust Congress to leave the ROTH rules alone until you need the money – or die.

Also, next year there is scheduled to be a 3.8% surtax on unearned income; this was put into play to help fund the new health care reform law. While withdrawals from your IRA aren’t subject to this surtax, the withdrawals will, of course, boost your AGI, which could trigger AMT tax.

Be sure to contribute the maximum you can to your 401k plan or other retirement plan. That is a good idea under any circumstances.

Gifting makes good sense to shelter taxes from the estate tax. Unless something is changed, the exclusion drops from 5.12 million this year to 1 million next year. Therefore, gifting makes very good sense. Be sure to review your estate plan and see if more gifting, or contributing to a Charitable Trust make sense.

If you believe rates will increase in 2013, then it makes sense to take a different attitude this year and boost income into 2012, rather than defer. Even medicare tax on wages is scheduled to go up in 2013 to pay for the health care law. That additional .9% on wages will affect almost every wage-earner.

Finally, map out your itemized deductions. If the rates increase in 2013, the deductions will be more valuable in the future. One change that is scheduled to happen is the limits on deductions; that will go back into effect in 2013 unless Congress acts. Therefore, taxes will go up for the higher income earners due to the loss of some deductions.

Work carefully through the next few years to try to beat the tax man – it won’t be easy!

Source: Linda Barlow, CFP

For other financial articles or tax tips, please visit http://wise-investors.org