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Subscribe to RSSHoliday plans have been made, and you now have two weeks left in 2012 to score some big savings and fatten your wallet now and in 2013. Sharon Epperson offers tips on how to increase your savings by claiming credit card rewards, selling winning investments, and more.
Your holiday shopping may be nearly done, but did you put yourself on the list? It's not too late. Take advantage of these smart tax moves before Dec. 31, and your biggest gift of the season could be the potential savings for months and years to come.
While the 'fiscal cliff' debate continues, financial planners and tax experts agree many Americans should plan now for higher tax rates next year and beyond. But by adopting these few tax strategies now, you'll be ready for many of the changes ahead that could impact your income and investments. Here are tax strategies worth considering now:
Convert a traditional IRA to a Roth account
Converting all or part of a traditional Individual Retirement Account (IRA) may be one of the best ways to lock in savings. Withdrawals from a traditional IRA are taxed at your federal income-tax rate. If your rate goes up, converting even a portion of your regular IRA to a Roth IRA now will likely lessen the overall tax bite in the long run.
What's also great about a Roth is that all future earnings and qualified withdrawals are tax free as long as you're at least age 59 1/2, and you've had a Roth IRA for at least five years. A Roth is a great way to lock in savings now, since you'll owe no more income tax in the future when you make qualified withdrawals in retirement.
The only hitch is you need to make sure you have the money to cover the taxes that you'll have to pay on any pre-tax amount that you convert to your Roth IRA. Also, if for some reason tax rates go down next year, you can change your mind. You have until Oct. 15, 2013, to undo the conversion and turn your Roth back into a regular IRA.
Sell winning investments
You should never make an investment decision based solely on tax implications. But if Congress does not extend current tax rates, long-term capital gains and dividend taxes could be going up significantly next year. Capital gains rates could rise from 15 percent this year for most tax payers to 20 percent in 2013. The top rate for dividends may jump to 39.6 percent next year. So if you're already planning to sell an investment to raise cash next year, you may want to sell a portion of your position now to take advantage of lower tax rates. So lock in your profits!
Accelerate income
If you want to make sure you take advantage of federal income tax rates you have now — likely lower than they will be next year — it also makes sense to accelerate your income before Dec. 31. If you earn a steady wage at your job, doing this can be difficult. But if you're self-employed, you should bill your customers now to make sure they make payments in December, rather than January.
Pay 2013 tuition now to get a big tax credit
College costs continue to rise, but there are a few ways to save — at least for a few more weeks. The American Opportunity Credit is a great tax break for college students and their parents, providing credit for a maximum of $2,500 of qualified tuition and related expenses. But this is one of those tax measures that could expire at the end of the year as Congress looks for ways to cut the federal deficit. Claim your eligible education expenses while you can. Upgrade your laptop now to get to you the limit. If you still haven't reached the $2,500 limit, pay part of your 2013 tuition bill before Dec. 31 to qualify for the highest tax credit that's available.
Pay medical expenses before the end of the year
Anyone who normally itemizes medical expenses on their tax return should accelerate those expenses into 2012 if they can. Right now, medical expenses are deductible only if they exceed 7 percent of adjusted gross income (AGI). Next year the threshold jumps to 10 percent of your income (this only applies to people under age 65). Pay your January medical insurance premium in December to move this deduction to 2012. Any routine eye exams or dental visits should be moved up to December too. Paying with a credit card would give you the deduction this year and delay the actual payment until 2013.
Talk to a tax adviser and/or financial planner to see if these tax-saving strategies are right for you.
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6th way, and the best way: Pack all your money in a suitcase and skip the country.
# 6 Die now, why the death tax exemption is still high. Why wait for Obama's unelected death panel to pronounce you as unfit to live?
I was going to say the Romney way but you beat me to it.
Sell your house now, get out of the stock market all together, deterring taxes was such a stupid thing to do because the current tax rates are higher than when we put the money in!!! The tax increases are going to gut the middle class so if they don't get busy and cash out now BO will steal it from them for the obamafone gutter goons! The next four years are going to be hell like the last four, more recession!
Wow, teh stoopid, it burns.
1) Sell your house now - why? No talk of changing the tax code re the $250K/$500K exemption on capital gains from sale of your home.
2) Get out of the stock market all together - why? 73% of us (that is, the poor and middle class) don't own stocks anyway except through a retirement plan or an employee stock purchase plan. These investments grow tax free, so why sell them?
3) Current tax rates are higher than when we put the money in? - Uh, no. Current tax rates are what they were under Bush, which is lower than Clinton and Reagan/Bush I rates, so this is a lie.
4) Tax increases are going to gut the middle class - only if the Republicans decide to screw the middle class to try to get lower taxes for the rich.
5) No, it's not the obamafone - the program started under Bush, passed by a Republican house/senate. The program cost is $1.6 billion, so that's $20 per tax unit. I don't see how $20 will gut the middle class.
6) More recession? We haven't been in a recession for the past 3 years and last quarter's growth was 2.7%. Another lie.
Bob, the 2nd quarter GDP was 1.3%. This is the weakest "recovery" since the Great Depression. Total Year 2011 GDP growth was 1.9%. Not sure at all that 2012 will top that.
Glad that 51% of us are happy with these results. Those of us that are "producers" are not real impressed.
Americans hardly pay any taxes right now.
This is great tax advice. Hold on a moment while I pull all the cash for these tactics out of my butt. Oh I see, it's supposed to come from selling my winning investments. Well, like 73% of all Americans, I don't own any individual stocks or bonds outside a retirement account and/or an employee stock purchase plan, so this isn't actually possible.
Oooh, the top rate for dividends will go up to 39.5% from 35%! For those making over $388K in taxable income - less than 3% of us. Capital gains tax will go up from 15% to 20% - how terrible! Except, as noted above, 73% of us don't own stocks or bonds outside retirement or stock purchase plans, and our homes are well under the $250K/$500K limit.
Pay your January medical premium in December. Well, 16% of us are uninsured, 25% are thru Medicare/Medicaid/military and 45% through our employer. I guess the other 14% could do this.
Pay 2013 tuition to get to the $2,500 tax credit? Well, I guess if you are just starting school in 2013; I can't imagine paying less than $2,500 for tuition in 2012 if you're already a student.
Convert your IRA - I would if it weren't already. Of course, for those that haven't - by all means do so. Let's see, say you have $100K in it, that's $25K in taxes to pay to convert it, let's see how long it takes you to make that up.
Accelerate income - this is one of my favorites. Yes, because I don't have regular payment terms with my customers, I arbitrarily wait for useless articles like this to tell me when to bill them, and what terms they have to pay.
Well, the top 5% may thank you for this article. As for the rest of us, go live your life, live prudently, and don't live according to tax rules.
to put that capital gains tax in better perspective, if you paid $15,000 in capital gains taxes this year, next year, on that same amount, you'd pay $20,000 ----- that's an increase of 33.3%, not 5%, like some people would like to believe..
Bob - you might come off as an educated sort here, but if you knew what you were talking about you would realize that the "top 5%" are unable to utilize half the strategies here:
- The American Opportunity and Lifetime Learning credits are phased out for high-AGI taxpayers
- High-AGI taxpayers are disallowed from making Roth contributions
- High-AGI taxpayers will also be unable to recognize any benefit from accelerating medical expenses as the 7.5% (soon to be 10%) floor is prohibitively high.
One of the more significant facets of the cliff that has evaded any real attention is one that will potentially inflict the most damage to middle-class taxpayers, and it has nothing to do with superficial bracket tweaks: Alternative Minimum Tax. If Congress fails to extend the "patch" -increased exemption amount- potentially 30M+ taxpayers will be subject to AMT. The issue is exacerbated by the fact that popular itemized deductions such as SALT (state & local taxes), real estate taxes, miscellaneous itemized deductions (e.g. unreimbursed business expenses such as mileage, etc.) are all disallowed for AMT calculations.
And don't even get me started on the changes to Estate taxation...
These are winning strategies for people that actually have lots of money. The average Americans I mingle with are trying to make it payday to payday. And the ongoing depression for most people will continue now unabated into the future.
Rich people problems. Most folks don't happen to have the next year's worth of tuition just laying around, or the luxury to be able to pay off a year's medical bills at once, or enough spare cash to throw away on the stock market to even have any "winning investments." Most folks are struggling just to make it week to week, paying whatever they can at a time.
Why not just add "Hide your capital gains in Switzerland and the Caiman Islands to avoid being taxed" and "Write off your Olympic dancing horse" to this list?
The middle class hardly pays any income taxes. We made 91K and paid 6% last year and that is with out a mortgage deduction. When we made 70K a few years ago we paid 4.7%. We have found in the past 4 years paying off 130K of debt was the bast thing we could have done for ourselves and our income has only gone up.
if you own a business, there are ways to improve your tax liability for next year ---- for instance, if you were thinking about upgrading your computers, or other office equipment, that's a direct write-off against your net income. ------- if you are in retail sales, take advantage of low wholesale prices and order extra inventory, which is a direct write-off against gross income, and i've been using this method to reduce my own liability for a few years now.- -------- if you have a good relationship with your employer, have a portion of your income deferred until some future date.
You shouldn't be finding ways to save on taxes, you should be happy to pay your "fair" share - people across the country are depending on you to pay for stuff.
well.... i stopped feeling guilty about being responsible for my neighbors years ago ----- first, you have to ensure your own financial health, then.... if you are successful in going so, you will be able to help your neighbors. ----- the point is to avoid being one of the people who requires assistance.
I don't know how many of you bank at 5/3rd but if you do and you are retired collecting Social Security they have an account called Advanced Account or something like that. What it does is let you borrow 1/2 the amount of your Directly Deposited Check every month as long as you pay it back with your next DDCheck. Mine was $798 a month but for some reason this month it was reduced to $598. There was no explanation for it so I'm assuming (something I try not to do) my check is being cut or reduced for some reason. Being Social Security I have already paid my tax on it so it has or should have nothing to do with taxes. Anyone know what is going on?