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    Winter-2016  


Primer: Smart Financial Moves for Late 2012 and Early 2013

Due to the continued uncertainty of tax reform, fiscal cliff and economic slowdown, small business leaders need to look at their personal as well as business financial well being.

For the small business leader there are some year-end financial moves to be made that may prove crucial to the pursuit of financial goals as well.

What can be done to lower your 2012 taxes? Before the year fades away, there are plenty of options. Here are a few that may prove convenient:

Make a charitable gift before New Year’s Day. Claim the deduction on 2012 return, provided Schedule A is used. The paper trail is important here.
If cash is given, document it. Even small contributions need to be demonstrated by a bank record, payroll deduction record, credit card statement, or written communication from the charity with the date and amount. Incidentally, the IRS does not equate a pledge with a donation. If you pledge $2,000 to a charity in December but only end up gifting $500 before 2012 ends, only $500 may be deducted.
Gifting appreciated securities? If owned more than a year, a deduction for 100% of their fair market value is possible and avoid capital gains tax that would have resulted from simply selling the stock, fund or bond and then donating those proceeds. (Of course, if the investment is a loser, then it might be better to sell it and donate the money to claim a loss on the sale and deduct a charitable contribution equivalent to the proceeds.)

Does the value of the gift exceed $250? It may, and if that amount or larger is gifted to a qualified charitable organization, a receipt or a detailed verification form from the charity is needed. A Form 8283 is required when the total deduction for non-cash contributions or property in a year exceeds $500.
To check if an organization is eligible to receive charitable gifts, go to www.irs.gov/Charities-&-Non-Profits/Exempt-Organizations-Select-Check.

Contribute more to a retirement plan. If not yet 70½ and participate in a traditional (i.e., non-Roth) qualified retirement plan or have a traditional IRA, it is possible to reduce 2012 taxable income by the amount of the contribution. If self-employed and don’t have a solo 401(k), a SIMPLE plan or something similar, consider establishing and funding one before the end of the year. Also, keep in mind that the 2012 tax year contribution to an IRA or solo 401(k) may be made as late as April 15, 2013 (or October 15, 2013 if you file Form 4868).
In 2012, the contribution can be up to $17,000 in a 401(k), 403(b) or profit-sharing plan, with a $5,500 catch-up contribution also allowed if age 50 or older. An individual can put up to $11,500 in a SIMPLE IRA in 2012, $14,000 if you are 50 or older.

Make a capital purchase. If a business purchases assets that have a useful life of more than one year – a truck, a computer, furniture, a rototiller, whatever – those purchases are commonly characterized as capital expenses. For 2012, the Section 179 deduction can be as much as $139,000 (although it is ultimately limited to net taxable business income). First-year bonus depreciation is set at 50% for most purchases of new equipment and software in 2012. The way it looks now, the 2013 deductions may be much less generous.

Open an HSA.. By establishing and funding a Health Savings Account in 2012, it is possible to make fully deductible HSA contributions of up to $3,100 (singles) or $6,250 (married couples). Catch up contributions are allowed if 55 or older.
Practice tax loss harvesting. Sell underperforming stocks in a portfolio – enough to rack up at least $3,000 in capital losses. If it ends up that total capital losses top all of the capital gains in 2012, up to $3,000 of capital losses can be deducted from 2012 ordinary income. If there are over $3,000 in capital losses, the excess rolls over into 2013.

Are there other major moves to consider? The to-do list might be long, for much financial change may occur in 2013.

Pay attention to asset location. Here are two big reasons why tax efficiency should be a priority as 2012 leads into 2013:
Next year, dividend income is slated to be taxed as regular income. So tax on qualified stock dividends could nearly triple for the wealthiest Americans.
Capital gains taxes for high earners are scheduled to jump 33% in 2013. Long-term capital gains are now taxed at 15% for those in the highest four income brackets; that rate is supposed to rise to 20% next year.

hould maximum contributions to IRAs be made on January 1? The rationale behind this is that the sooner contributions are made, the more interest those assets will earn. 2012 IRA contributions came made until April 15, 2013.
In 2012 up to $5,000 contributions can be made to a Roth or traditional IRA if age 49 or younger, and up to $6,000 age 50 and older (though an individuals MAGI may affect how much can be put into a Roth IRA).
What are the income limits on tax deductions for traditional IRA contributions? If an individual participates in a workplace retirement plan, the 2012 MAGI phase-out ranges are $58,000-68,000 for singles and heads of households and $92,000-112,000 for couples.

Should you go Roth before 2013 gets here? It is expected federal taxes are poised to rise next year, but one little detail isn’t getting enough publicity: the planned 3.8% Medicare surtax scheduled to hit single/joint filers with AGIs over $200,000/$250,000 will not apply to qualified payouts from Roth accounts.
MAGI phase-out limits affect Roth IRA contributions. In 2012, phase-outs kick in at $173,000 for joint filers and $110,000 for single filers. Should a MAGI score prevent contributing to a Roth IRA at all, an individual still has a chance to contribute to a traditional IRA in 2012 and then roll those assets over into a Roth.
Consult a tax or financial professional before making any IRA moves to see how it may affect an individuals overall financial picture. If an individual has a large traditional IRA, the projected tax resulting from the conversion may make this a negative option.

What else should you consider as 2012 turns into 2013? There are some other important things to note.

Payroll taxes are slated to increase 2% next year. The payroll tax cut of 2011-12 has slim chance of extending into 2013. The maximum payroll tax paid by high earners is slated to be $7049.40 next year, $2,425 above 2012 levels. That isn’t just because Social Security taxes for employees are returning to the 6.2% level; it also reflects a 3.3% increase in the upper salary limit subject to the tax to $113,700.

Review withholding status. Aside from the presumed end of the payroll tax holiday, there are other reasons an individual may want to adjust your withholding status…

  • You tend to pay a great deal of income tax each year.
  • You tend to get a big federal tax refund each year.
  • You recently married or divorced.
  • A family member recently passed away.
  • You have a new job at a much greater salary.
  • You started a business venture or became self-employed.

If you are retired and older than 70½, remember RMD. Retirees over age 70½ must take Required Minimum Distributions from traditional IRAs and Roth 401(k)s and all employer-sponsored retirement plans by December 31, 2013. The IRS penalty for failing to take an RMD equals 50% of the RMD amount.
If an individual turns 70½ in 2012, he or she can postpone their first IRA RMD until April 1, 2013. The downside of that is that the individual will have to take two IRA RMDs next year, both taxable events –2012 tax year withdrawal by April 1, 2013 and your 2013 tax year withdrawal by December 31, 2013 are required.
It is important to plan RMDs wisely. If you done well, it is possible to limit or avoid taxes on Social Security income. Some Social Security recipients don’t know about the ‘provisional income’ rule – if a modified AGI plus 50% of Social Security benefits surpasses a certain level, then a portion of the individuals Social Security benefits become taxable. For tax year 2012, Social Security benefits start to be taxed at provisional income levels of $32,000 for joint filers and $25,000 for single filers.

Consider the tax impact of any 2012 transactions. Did the individual sell real property this year – or plans sell before 2012 ends? Did the individual start a business? Are they thinking about exercising a stock option? Could any large commissions or bonuses come his or her way before January? Did the individual sell an investment held outside of a tax-deferred account? Any of this might significantly affect 2012 taxes.

Would it be worth making a 13th mortgage payment this year? If the individual’s house is underwater, there’s no sense in doing it – and it could also argue that the dollars might be better off invested or put in an emergency fund. Those factors aside, however, there may be some merit to making a January mortgage payment in December. If the individual has a fixed-rate loan, a lump sum payment can reduce the principal and the total interest paid on it by that much more.

s marriage contemplated in 2013? If so, why not review the beneficiaries of a workplace retirement plan account, RA, and other assets? In light of marriage, an individual may want to make changes to the relevant beneficiary forms. The same goes for insurance coverage. If an individual will have a new last name in 2013, he or she will need a new Social Security card. Additionally, a spouse may have individually particular retirement saving and investment strategies. Will they need to be revised or adjusted with marriage?

Are you coming home from active duty? If so, go ahead and check the status of your credit, and the stat of any tax and legal proceedings that might have been preempted by your orders. Make sure your employee health insurance is still there, and revoke any power of attorney you may have granted to another person.

Talk with a qualified financial or tax professional today. Vow to focus on being healthy and wealthy in the New Year.
Bill Losey, CFP® is the President of Bill Losey Retirement Solutions, LLC, an independent fee-based registered investment advisory firm.  Learn more at www.MyRetirementSuccess.com and www.BillLosey.com.

 


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