Tuesday, August 4, 2020
League of Power

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"Freedom by Friday"

8 Strategies to Lower Your Tax Bill NOW

Normally I’d be writing to you about tax moves to make before the end of this year to help reduce your upcoming tax bill. But the upcoming “fiscal cliff” that you hear about on TV every day is adding another layer to the situation.

If you hadn’t heard Congress still hasn’t settled whether or not it’s going to extend the Bush era tax cuts. They may extend them or extend them with some modifications or they may let the tax cuts expire altogether. What happens is anyone’s guess.

They’ve got to decide if they are going to let the tax cuts expire on our income, investments, gifts, estates, deductions and other breaks. Republicans and Democrats agree that some cuts need to be made before the end of the year, but as usual they can’t agree on which ones.

I believe in planning for the worst, but hoping for the best. That means I am going to assume taxes are going to go up next year. Because of that I am going to recommend making a few different end-of-year tax saving moves than I normally would. Keep reading to learn how you can save some money on your tax bill this year, before your taxes go up.

1.    Covert to a Roth IRA

If you’ve been thinking about converting your traditional IRA to a Roth, do it now before the end of this year. You’ll have to pay income tax on the amount converted, but you will have to pay even more if the tax cuts aren’t renewed.

Whether taxes go up next year or not, they WILL go up in the future. The fear is that taxes will be much higher when you retire and need to tap into your IRA. That’s why 2012 is the ideal time to convert.

If Congress decides to extend the tax cuts, you can undo the conversion. By law you have until October 15, 2013 to undo the conversion and get back the taxes you paid. You’ll know what 2013 tax rates will be by then. This one is a no brainer.

2.    Get the Maximum Benefits from Giving Gifts

Estate and personal gift taxes are two of the biggest issues Congress is divided over. Both are set for major increases if Congress doesn’t extend the current tax cuts.

For 2012, the estate tax and the lifetime gift tax exemptions are $5,120,000 per person and $10,240,000 per couple, with a 35% top tax rate. If Congress doesn’t act by the end of the year those exemptions will drop to $1 million per person and $2 million per couple, and the top tax rate will rise to 55%.

If you have been planning to give away a large gift, then make sure you do it before 2012 ends. Don’t wait till the last minute on this one, estate planning and gift giving requires the knowledge of a professional.

3.    Get those Gains

If Congress doesn’t act by year’s end the IRS will start taxing short-term and long-term capital gains at a much higher rate. Short-term is set to increase from 35 percent to 39.6 percent and long-term from 15 percent to 20 percent.

Reduce your tax bill by selling any stocks or assets that have appreciated significantly this year. If you wait and sell them next year and these tax cuts aren’t extended you’ll pay a larger tax bill on the appreciation.

4.    Make More Money

Any other year, you’d be trying to reduce your taxable income and increase deductions at this point. But reversing those strategies in 2012 could be more advantageous if tax rates rise next year. While this will cause you to owe more taxes in 2012, your combined tax bill over the next two years would be reduced.

If you’re sure you’re getting a bonus this year, ask your employer to pay you before the end of the year. Likewise, if you’re self-employed you can ask your clients to pay you for work you do in December before the end of the month. Or, if you’re retired and are planning to make a withdrawal from your retirement accounts in the first quarter of 2012, you could take it this year instead.

You may also want to consider delaying some tax deductions till next year. For example if you are self-employed or a business owner you can pay your state’s 4th quarter estimated taxes next year instead of this one. You can bunch your charitable donations and double up the deduction to take off of next year’s tax bill.

Regardless of whether or not taxes go up, you should make this next tax savvy move. It will reduce your tax bill no matter if you made $30,000 or $300,000 in 2012.

5.    Max Out Your Tax-Deferred Accounts

If you have an IRA, 401(k), SEP (Simplified Employer Pension) or an HSA (Health Savings Account), you should contribute as much as you can to it this year. Any contributions made to these tax advantaged accounts are not included in your taxable income.

You have until April 15, 2013 to make a 2012 contribution to your IRA, SEP or HSA, but you must act before the end of the year to max out your 401(k) contribution for 2012.

It’s anyone’s guess what Congress will do to stop us from falling off this “Fiscal Cliff.” I for one don’t want to be left holding a bag full of higher taxes. Do yourself the same favor and plan ahead by taking strides to reduce your tax bill in the upcoming year.

Good luck!

Keeping Money in Your Pocket,

Nancy Patterson

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