The recent discussions on fiscal cliff have affected the 2013 financial planning for many of us. But there are some tried and tested moves which will help you lower your 2012 tax bills which will be due in April, 2013.
Check out some of the tax tips which will help you lower your tax bills for 2012:
1. Use your flex account: You should use your flex account by 31st December, 2012 or else you may lose it. It should be noted here that some employers require employees with flexible spending accounts (pre-tax dollars that pay out-of-pocket medical and childcare expenses) to forfeit contributions that go unused by December 31st.
2. Fund college savings 529 plan: You should take time to save money in your college savings 529 plan. It’s high time to do so now as the student loan debt is somewhere around $1 trillion. You should remember that money saved in this program is tax free.
3. Fund your retirement plan contributions: You should note that the funding deadline for 401k or 403b plans is December, 31st. Funding your retirement fund will help you save for the future and will also reduce your tax burden.
4. Mail checks for deductible purchases: If you are one of them who wait for the last minute for everything, then be alert. In order to qualify for write-offs regarding charitable contributions and business expenses, your payments must be postmarked by midnight of December 31st, 2012. Donations which are made with a credit card are deductible as of the date the account is charged.
5. Go for RMDs: You should withdraw the Required Minimum Distributions (RMDs) by 31st of December. However, there is an exception. Those tax payers who are taking out their first required payout may do so by April, 1st, 2013. You should note that the penalty on not taking your required minimum distribution is steep - 50% on the shortfall.
6. Convert traditional IRA into Roth IRA: You must know that a conversion will require you to pay the tax due on your retirement now instead of paying it in the future. If you pay for the taxes on conversion in 2012, you will have to pay much less than what you will have to pay in 2013.
7. Shift income: In case you're self-employed, you should estimate your income for 2012 and 2013. If your tax bracket could rise next year, then you should delay making tax-deductible business purchases until January, when the write-offs will be more valuable. If you think you'll bring in less money in 2012, you can do the reverse.
8. Avoid a wash sale: You must note that the IRS won't let you deduct a loss if you buy a "substantially identical" investment within 30 days of your last investment. It is known as wash sale. In order to avoid the wash sale, you should wait for 31 days and repurchase the stock or fund you sold.