Everyone needs help with tax strategies. Earlier in the week I posted a few ideas. Now I am continuing with some additional tips. If you haven't read the earlier post, I hope you will go back and read it for more ideas.
Review Your Portfolio Allowing taxes to dictate your investment strategy is rarely a good
idea. But if you’re already considering selling appreciated securities
or other assets -- even if you don’t have losses to offset them --
cutting them loose by year-end could save you money (you can harvest
losses to offset investment gains, plus shield up to $3,000 of ordinary
income from taxes).
Unless Congress extends the Bush tax cuts, the top rate on capital gains
will rise to 20%, and the top rate for dividends will jump to 39.6%.
Even if Congress extends current rates, the new 3.8% surtax on unearned
income, levied on singles with adjusted gross income over $200,000 (over
$250,000 for married couples), will boost the top rate for long-term
capital gains and dividends to 18.8%.
If you think you’re going to need to sell some of your investments to
raise cash next year, do it before December 31. And if you're an
investor in the two lowest income tax brackets, 2012 is the last year
you will pay zero tax on capital gains and dividends.
To take advantage of the 0% capital-gains rate for 2012, your taxable
income can't exceed $35,350 if you are single; $47,350 if you are a
single head of household with dependents; or $70,700 if you are married
Convert Your IRA to a Roth If you think your tax rate is going to rise sometime in the future,
converting to a Roth makes a lot of sense. Withdrawals from traditional
IRAs are taxed at your ordinary income tax rate, while all withdrawals
from Roths are tax-free and penalty-free as long as you're at least 59½
and the converted account has been open at least five years. You do have
to pay taxes on any pretax contributions and earnings in your
traditional IRA for the year you convert. That's why converting before
New Year's Eve is smart: You'll pay taxes at current tax rates, which
are unlikely to go any lower.
If you're an upper-income taxpayer -- with modified adjusted gross
income of at least $200,000 if you're single or $250,000 if you're
married filing jointly -- you have an even greater incentive to convert
in 2012 because converting next year could trigger a new 3.8% surtax on
unearned income. (The surtax was enacted to pay for some of the costs of
the health-care reform law.) Withdrawals from an IRA aren't subject to
the surtax, but they're counted as adjusted gross income and could lift
your AGI above the threshold.
There is a major caveat, though. We think a major tax reform package
could be enacted as early as next year that would lower overall tax
rates, while eliminating tax credits and deductions. If that happens,
you'd be better off converting after December 31. Fortunately, when you convert to a Roth, you can change your mind. If it
looks like tax reform is going to lower your tax rate, you have until
October 15, 2013, to undo the conversion and turn your Roth back into a
Give to CharityThis is a great time of year to clean out your closets and garage, but you can write off donations to a charitable organization only
if you itemize deductions. A few bags full of gently used clothes and
household items can add up to hundreds of dollars in tax deductions, but
valuing those donations can be difficult. (Try Turbo Tax's free tool).
If you donate a used car worth more than $500 to charity, your deduction
will be limited to the amount the organization receives when it sells
it. But you may be able to claim a bigger deduction based on the
vehicle's fair-market value if the charity uses it to deliver meals, for
example, or gives it to a needy individual. The charity will list the
vehicle's sale price, or whether an exception allowing a higher
deduction applies, on Form 1098-C, which you must attach to your tax
return. Because of previous abuses, donations of used cars and other
noncash items may attract extra scrutiny from the IRS. So keep
Send cash donations to your favorite charity by December 31 and hang on
to your canceled check or credit card receipt as proof of your donation.
If you contribute $250 or more, you'll also need an acknowledgment from
Spend Down your Flex Plan (If You Need to)If you're thinking of cleaning out your 2012 flexible spending account
to avoid the "use it or lose it" rule, remember that you can no longer
use flex funds to pay for over-the-counter medicines, such as aspirin,
ibuprofen or allergy meds, without a prescription (except for insulin).
But that restriction does not apply to other nonprescription medical
items, such as crutches, contact-lens solution or bandages. (For a list
of what is allowed by law, see IRS Publication 502.) The same rules on
eligible purchases apply to health savings accounts.
In most cases, you have until March 15, 2013, to use your 2012 funds,
but some employers still adhere to the December 31 deadline for using
the money or forfeiting the balance. Check with your employer to verify
your plan's deadline.