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11 Last-Minute Tax Moves to Make in 2012

December 14, 2012

1. Sell stocks with long-term capital gains

But only if you were already planning to sell them. The reason: “The capital gains tax may be the same next year, but there’s a good chance it’ll be higher—and there’s no chance it’ll be lower,” says Bernard Kiely, president and chief compliance officer at Kiely Capital Management. Currently the long-term capital gains rate is 15 percent for most people; there’s a chance it will increase to 20 percent (23.8 percent for high earners) in 2013. Taking gains this year will help you avoid those higher tax rates.

Bottom line: If you were planning on selling in the next 6 to 12 months, do it now to take advantage of the 2012 tax rates.

2. Exercise stock options in 2012

The same premise applies here. If you’re already intending to exercise stock options in the near future, better to do it in 2012, says Drew Tignanelli, president of the Financial Consulate. In 2013, high earners will have to pay an additional 3.8 percent on net investment income.

3. Increase your withholdings

We know for a fact that Medicare taxes are going to be higher next year. But many people don’t realize that if your earned income is over $200,000 (or $250,000 for joint married filers), you’re going to pay a .9 percent higher tax on your wages.

One thing you can do to ease the sting of the added expense if you fall into this category, says Kiely, is to increase your withholdings from your paycheck—this way you won’t owe as much money come tax season.

4. Prepay education

Putting money into a 529 plan is a really good option for parents or grandparents trying to finance a child’s education, says Diahann W. Lassus, president of wealth management firm Lassus Wherley and Associates. As long as you use the money you put into the plan for qualified education expenses, the income on it is not taxed.

“These plans also offer a lot of flexibility,” says Lassus: If one child decides not to go to college, then the beneficiary of her account can be changed. Also, if you run into tough times, you can take back the principal without penalty. However, any earnings will be taxed and assessed a 10 percent penalty.

And just as important, the earnings in the accounts grow on a tax-deferred basis. The savings here can be substantial: If you saved for educational expenses in a regular mutual fund, your federal income tax on earnings from that fund could increase from 15 percent in 2012 to as much as 43.3 percent in 2013 for high earners.

5. Shop for your business

If you’re considering buying equipment for a small business, now is the time to do it, says Lassus. Currently, under Section 179 of the tax code, business owners can deduct up to $139,000 for equipment or machinery purchased this year. On January 1, that limit may fall to $25,000.

6. Increase your 401(K ) contributions

This is a no-brainer, says Tignanelli.  The money you put into your 401(K) plan doesn’t count toward your taxable income (and that money won’t be sitting somewhere else where it may be taxed at a higher rate). So if you haven’t maxed out your contributions, put money into your retirement plan before year’s end. Right now workers under 50 can contribute up to $17,000 and those 50-plus can put in $22,500.

7. Make an extra mortgage payment

There’s a chance that Congress will do away with the mortgage interest deduction for homeowners next year. If you have money left over after you’ve maximized your contributions, you may want to make an extra mortgage payment, says Kiely. (Though if you have a really low interest rate, those dollars may be better used somewhere else).

8. Convert to a Roth IRA 

If you’re considering rolling over your traditional IRA to a Roth IRA, 2012 is the time to do it for a couple of reasons, says Lassus. First, the rate on the taxable portion of the converted amount could go up to 39.6 percent next year for high earners. Second, converting now can help you avoid that additional Medicare surtax.

Bonus: If you convert and the tax rates don’t increase, you can reverse the transaction any time before October 15, 2013.

9. Consider charitable contributions

People give to charity for all sorts of reasons. From a strictly tax perspective, you might consider forgoing your charitable contribution this year and doubling up next year if you believe your tax rates are going to be higher, in which case the contributions could be worth more. But a word of caution, says Lassus: If you’re in a super high income tax bracket, deductions may be limited.

10. See the doctor

Next year, it will be harder to claim medical deductions.

Currently, taxpayers can deduct the amount of their medical expenses that exceeds 7.5 percent of their adjusted gross income. In 2013, that threshold will jump to 10 percent for most people.

If you think your medical expenses in 2012 will be greater than 7.5 percent of your adjusted gross income, says Kiely, you may want to maximize your expenditures this year by prepaying for drugs, elective surgeries, dental exams and other medical expenses.

If you’re over 65, no need to rush to the doctor’s office—you can enjoy the 7.5 percent rate until 2016.

11. Move income into 2012

Most nine-to-fivers don’t have this option. But if you do, accelerating your income is a good way for high earners to avoid the .9 percent Medicare tax increase next year.

Consider asking your boss for your bonus early. If you’re self-employed, think about collecting accounts receivable this year rather than next.

Keep in mind that the reverse holds true for deductions.  Pushing your deductible expenses to 2013 rather than 2012 can produce more tax savings.  This is because the deductions can offset 2013 income taxed at higher rates.

One Comment leave one →
  1. insiderhedge permalink
    December 14, 2012 9:52 AM

    Reblogged this on Insider Hedge.

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