Lower your IRS bill through careful planning of both short- and long-term tax strategies.
Have you ever considered a "Financial Bucket List"? If not, maybe you should.
The January 2012 issue of akronlife featured “The Ultimate Akronite Bucket List,” which included some really unique ideas for things to do locally this year. (If you missed that issue, you better go back and check it out; I’ve even put some of the ideas on my bucket list.)
I never even considered a bucket list until recently — I didn’t even know what one was! Since I’m usually behind the times, I consulted with my son, Jake, as to what’s on his bucket list. “I don’t know yet,” he responded. “I’m only 19.”
So I continued my research elsewhere …
Urban Dictionary defines a bucket list as: 1. A list of things to do before you die 2. A list you make with friends of things you always say you’re going to do and don’t. Not to do before you die, just for fun.
We go through life approaching age milestones — 16, 18, 21, 30, 40, 50, 65 and so on. Whether we realize it or not, each of these milestones sort of corresponds with an unwritten bucket list item — driver’s license, vote, first legal drink, college, marriage, children, grandchildren, retirement, etc.
For me personally, until this year, my unwritten bucket list consisted of achieving such things as getting my children through college, financing a couple weddings, spoiling grandchildren, taking care of aging parents, planning for retirement and perhaps sprinkling some travel in between. I’ve come to realize, though, that this is more representative of a “Financial Bucket List” than a “Fun Bucket List.” (Since I’m approaching an age milestone this year, I’ve begun to develop my “Fun Bucket List,” too!)
Even though my “Financial Bucket List” was unwritten, it provided me with a basis for developing strategies for buying a house, opening my own business, saving for retirement and funding college for our three children.
What should be on your “Financial Bucket List”?
Financial and tax planning requires crafting your “Financial Bucket List” so that you know where you want to go. That way, strategies can be designed to help you get there. Children, college and retirement tend to be the more common list items. Even less fun but just as important, you’ll also want to include tax strategies on this bucket list — both short-term and long-term.
Careful tax planning will enable you to lower your taxes and have additional funds available for the other items on your “Financial Bucket List,” like children, college and retirement. But before you can develop tax strategies, you need to know where you are in relation to taxes.
I should clarify that the following information is directed at what you can do now — moving forward in 2012 — to change your current situation, hence, planning. However, in March, there are still some things that you can do to affect the prior year’s return, which I’ve included later in the article. Just keep in mind that most tax-planning ideas must be done prior to year-end.
That said, most of the key tax facts for 2012 haven’t changed from 2011, with the exception of some of the phase-outs, which are inflation-adjusted. The most critical short-term tax-planning strategy is being aware of the phase-outs, since changing your income just slightly could allow you the opportunity to have a deduction or, more importantly, a tax credit. The phase-outs vary by deduction or credit and by filing status.
For specific phase-outs, check out the IRS website at www.irs.gov. Some strategies may be more challenging than others to achieve, and some are just about being aware of the opportunities. Many opportunities are available to lower income.
What follows are a few strategies to consider for lowering your taxes:
If you have kids under age 17, strategies such as deferring more income through a 401(k) or funding a deductible IRA could result in receiving part or all of the Child tax credit of $1,000.
If you’re a married business owner, you may want to consider shifting income to your spouse and then filing as “Married Filing Separately,” which may allow part or all of the Child tax credit, as well as potentially lowering Ohio taxes. (The Child tax credit is one of the few credits that doesn’t require a joint return.)
Another tax strategy is for a business-owner parent to hire his/her children and compensate them with appropriate wages, lowering the income of the parent.
Health Savings Account
If you participate in a Health Savings Account (HSA), maximizing your contribution may lower your income to allow a deduction or credit. HSA withdrawals for qualified medical expenses are not taxable. This is a double win, since it lowers income (which also saves on Ohio taxes) and allows medical expenses to be deductible when the deduction is usually lost on the itemized deduction schedule.
For parents with college-bound students, there are numerous opportunities for planning. If you’re already there, as I am, be sure to watch your income so you don’t lose an Education credit. This is one credit that’s not available for “Married Filing Separately.”
Not only do you need to watch your income, but you need to plan for the timing of qualified education expenses. To receive the maximum credit, you must have paid qualified education expenses of $4,000 for you, your spouse or dependent who’s enrolled at least half-time in a degree program. A frequent misunderstanding is that the proceeds from a student loan may count toward qualified education expenses as “paid.”
If you’re not eligible to take the credit due to adjusted gross income (AGI) limits, you may shift the credit to the student by not claiming the student. For example the Hope/American Opportunity Credit of $2,500 begins to phase-out at AGI of $160,000 for “Married Filing Jointly” and $80,000 for “Single,” “Head of Household” and “Qualifying Widow.”
Another strategy for lowering income is to incur capital losses. Capital losses will offset capital gains and, if they exceed capital gains, are deductible against other income up to $3,000; any additional amounts will carry forward until completely utilized. The most common capital loss or gain is from the sale of investments such as stock, but can also be from real estate that’s not your principal residence.
If hitting certain income limits isn’t important, then you should seriously consider taking advantage of the lower tax rates for long-term capital gains that are still in effect for 2012. The maximum long-term capital gains rate remains at 15 percent. You may want to wait until closer to the end of 2012 before you trigger those gains, since Congress may decide to extend the lower capital gains.
Since it’s March 2012, the strategies noted above are what you can do to affect your taxes today, but what about 2011? If you haven’t yet filed your returns for 2011, consider:
1. You may still fund an IRA for 2011 up until April 17, 2012. Check to see if you qualify to make a deductible contribution and save on taxes.
2. If you participate in an HSA and didn’t max out your contribution limit, you have until April 17, 2012 to do so. Check with your HSA provider for additional amounts you may contribute for 2011 to save taxes.
3. If you’re married and both of you have income, review the option of “Married Filing Separately.” Depending on your tax bracket, this may save taxes.
4. If you have children in college, review the benefits of not claiming them as dependents. Children may be eligible for college tax credits that are phased out for parents.
What might we see in 2012 regarding taxes? Here are some frequently asked questions and answers …
Will the payroll tax cut apply for all of 2012? With the 2012 elections coming up, it would be political disaster to lower workers’ take-home pay, so anticipate the payroll cut to apply for all of 2012 (it was effective from Jan. 1-Feb. 29, 2012 as of press time).
What will happen to the Bush income-tax cuts that expire Dec. 31, 2012? Anticipate a one-year extension on tax rates for all taxpayers including high-income, as it will be pushed to 2013 since it’s highly unlikely that lawmakers will tackle this issue before elections.
Will the estate tax exemption fall after 2012? Again, anticipate the $5 million exemption to be extended for one year as part of the extension of the Bush tax cuts.
Will the break for direct IRA payouts to charity be revived for 2012? This is a non-controversial issue and will more than likely not be passed until the end of 2012 with the other Bush tax-cut extensions, so you’ll need to be on the lookout. This provision allows those who are 70½ or older to donate up to $100,000 a year from their IRAs directly to charity, thus not including the donated amount in taxable income.
Also, anticipate other expiring provisions — such as higher Alternative Minimum Tax (AMT) exemptions, deduction for state sales taxes and write-off of educator expenses — to be included in the extension. The biggest concern will be that an agreement won’t be reached before December 2012 — causing much last-minute tax planning.
Talk to your tax advisor about what’s on your “Financial Bucket List.” Knowing where you are and where you want to be will enable you and your advisor to help you achieve your goals in an ever-changing economic and tax environment.
/ Vicki Sussman, CPA, is founder and owner of Sussman & Associates, Inc. Her other roles include being a wife to Jon (married 25 years), mother of Leah, Megan and Jacob, and a community volunteer. In her spare time, you’ll find her canning the infamous Sussman Salsa, enjoying a good glass of wine or throwing a party in celebration of something.
E-mail them to editor Georgina K. Carson at firstname.lastname@example.org.