Whether you’ve had a good year, financially speaking, or one that can’t end soon enough, you may benefit from some simple year-end tax moves. By taking a little time now to review your income tax situation, you just may find yourself with a smaller tax bill next April. Here are nine year-end strategies that could lower your tax bill immediately, or for the years to come.
1. If you participate in an employer-sponsored retirement plan, make sure you’ve maxed out your contributions. People aged 50 and older are allowed to add extra money because of catch-up provisions. If you regularly get a year-end bonus, consider putting that right into your retirement plan on a pre-tax basis. That way you’ll defer paying the income taxes on it. If you are self-employed and don’t have a retirement plan, set one up. If you’re a “non-working” spouse, ask your tax advisor if you qualify to make a spousal contribution to an IRA. If you prepare your tax return and find that you are due a refund and you are otherwise eligible, you can claim a 2012 IRA contribution based on that anticipated refund, as long as you actually make the contribution by your tax filing deadline—April 15, 2013 for most people.
2. If you typically get a large refund, you‘re essentially giving the IRS an interest-free loan. Yes, it’s fun to get that little financial windfall every spring, but that money could be better used elsewhere. Talk to your payroll department about reducing your income tax withholding, and have that money direct-deposited to a savings account or investment portfolio instead. Even better, use it to pay off high-interest debt.
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3. If your income for 2012 was unusually high, or you are self-employed, it may be a good idea to perform a trial preparation of your tax return before the end of the year. This way, if you end up with taxes due, you can have more time to prepare and determine how you will pay the bill. More importantly, if your tax bill is too large, you may have to pay a penalty. Knowing now will provide you with time to take action and avoid that situation.
4. If you make over $200,000 a year, or are married and together you make over $250,000, look for ways to accelerate your income. In other words, shift income that you expect to receive next year, to this year, since there will an additional 0.9% Medicare tax on certain income beginning in 2013. Along the same lines, look for ways to defer tax deductions until next year. If you make under those income thresholds, employ the opposite strategy.
5. Review your investment portfolio and take any necessary strategy to defuse any capital gains “time bombs,” especially if you expect your income to increase in the future. You may be better off paying taxes on a smaller amount now, rather than on a larger amount next year or the year after. Similarly, if you have any investments that have decreased in value, consider harvesting your losses to offset any capital gains you may have. Even if you have no investment gains, you may be able to offset up to $3,000 of earned income.
6. Consider converting some or all of your traditional IRA to a Roth IRA. This may actually increase your tax bill for this year, but it should decrease your total taxes over your lifetime; even more so if you expect your earnings to increase going forward.
7. Gather up stuff around the house that you no longer have a need or use for, and donate it to your favorite charity. You’ll get rid of some of the clutter and get a tax break too.
8. If you’re lucky enough to have more money than you’ll ever need, consider sharing it with your family and friends. You can give up to $13,000 in 2012 to each individual you choose, without them having to pay federal gift taxes.
9. If you have a flexible spending or health savings account, ask your employer when the funds have to be spent in order to avoid forfeiting them. If it’s December 31—use it or lose it.
Disclaimer: This is for informational purposes only and not for the purpose of providing legal or financial advice. Consult your tax advisor to determine whether or not these ideas are appropriate for your unique situation.