5 Smart Ways to Save on Taxes Before the Year Ends
Even if the President and Congress reach a deal on U.S. tax and spending cuts and the country avoids going over the so-called "fiscal cliff",financial planners and tax experts agree many Americans may want to plan now for higher tax rates in 2013 and beyond. By adopting these few tax strategies now, you'll be ready for potential changes that could impact your income and investments down the road. Here are some tax strategies worth considering before the end of the year:
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 October 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 current tax rates are not extended, long-term capital gains and dividend taxes could be going up significantly next year. And if you make more than $250,000 a year, you'll have to pay a 3.8 percent Medicare tax on investment income, which goes into effect next year as part of the Affordable Care Act. 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!
If you want to make sure you take advantage of current federal income tax rates, it also makes sense to accelerate your income before December 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. It is scheduled to expire at the end of the year. If it is not extended, it makes sense to 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 December 31st to qualify for the highest tax credit that's available on your 2012 return.
Pay medical expenses before the end of the year.
If you normally itemize medical expenses on your tax return, get thoseexpenses in this year. For 2012, medical expenses are deductible only if theyexceed 7.5 percent of adjusted gross income (AGI). Next year the thresholdjumps to 10 percent of your income (this only applies to people under age 65).Pay next month's insurance premium by December 31st to move this expense to2012. If you can squeeze in a routine eye exam or dental visit next week, doit! Quick tip: paying with a credit card will allow you to claim the expense asa deduction this year, but you won't have to pay the bill until next year.
Talk to a tax adviser and/or financial planner to see if these tax-saving strategies are right for you.
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