The end of the year is quickly approaching, there is still time for you to take steps that can lower your 2012 taxes. However, you usually need to take action no later than December 31st in order to claim certain tax benefits.
Here are six tax-saving tips for you to consider before the calendar turns to 2013:
1. Make Charitable Contributions – If you itemize deductions, your donations must be made to qualified charities no later than December 31st to be deductible for 2012. You must have a canceled check, a bank statement, credit card statement or a written statement from the charity, showing the name of the charity and the date and amount of the contribution for all cash donations. Donations charged to a credit card by December 31 are deductible for 2012, even if the bill isn’t paid until 2013. If you donate clothing or household items, they must be in good used condition or better to be deductible.
2. Flexible spending account and dependent care accounts – If you have contributed to a flexible spending account (FSA) this year, make sure you empty the account before the end of the year. FSAs are a use-it-or-lose-it way to save for medical and other healthcare expenses. The same goes for your dependent care account. The Cigna website has a great list of eligible and ineligible expenses that will help you spend any last dollars you may have in these two types of tax-preferred savings accounts.
3. Consider a Portfolio Adjustment – Check your investments for gains and losses and consider sales by December 31. You may normally deduct capital losses up to the amount of capital gains, plus $3,000 from other income. If your net capital losses are more than $3,000, the excess can be carried forward and deducted in future years.
The fiscal cliff concerns come into play. If you have investments that you plan to sell in the near future, and you think that Congress and President Barack Obama won’t reach a deal to avoid the fiscal cliff, then you may want to sell these investments before the New Year because capital gains taxes will go up beginning January 1st. Definitely consult with your investment and tax advisors before making this decision, though.
4. Contribute the Maximum to Retirement Accounts – Elective deferrals you make to employer-sponsored 401(k) plans or similar workplace retirement programs for 2012 must be made by December 31. However, you have until April 17, 2013, to set up a new IRA or add money to an existing IRA and still have it count for 2012. You normally can contribute up to $5,000 to a traditional or Roth IRA, and up to $6,000 if age 50 or over. The Saver’s Credit, also known as the Retirement Savings Contribution Credit, is also available to low- and moderate-income workers who voluntarily contribute to an IRA or workplace retirement plan. The maximum Saver’s Credit is $1,000, and $2,000 for married couples, but the amount allowed could be reduced or eliminated for some taxpayers in part because of the impact of other deductions and credits.
5. Boost medical expenses – Under the health care law, there’s a higher hurdle between you and medical expense deductions starting in 2013. Currently, write-offs are permitted only to the extent your qualifying bills exceed 7.5% of your adjusted gross income. Next year, the threshold rises to 10%. However, for the 2013 to 2016 tax years, the 7.5% threshold applies if either spouse turns 65 before the end of the year.
6. Don’t Overlook the Small Business Health Care Tax Credit – If you are a small employer who pays at least half of your employee health insurance premiums, you may qualify for a tax credit of up to 35 percent of the premiums paid. An employer with fewer than 25 full-time employees who pays an average wage of less than $50,000 a year may qualify. For more information see the Small Business Health Care Tax Credit page on IRS.gov.
And here is one final tip to remember: you should always save receipts and records related to your taxes. Good recordkeeping is a must because you need records to prepare your tax return, and it will help you to file quickly and accurately next year.
