NFCC Financial Education Blog ? Last Minute Ways To Trim Your ...

By Jason Alderman

From now until New Year?s is probably when you have the least amount of time to spare on mundane financial bookkeeping tasks. But if you can dedicate a few minutes to review your benefits and tax paperwork, you might be able to shave hundreds ? or even thousands ? of dollars off your 2012 taxes.

Here are a few suggestions:?

Review your 401(k). If you haven?t already maxed out on contributions, ask your employer if you can make a catch-up contribution to your 401(k), 403(b) or 457 plan before year?s end. Most people can contribute up to $17,000 in 2012 (a $500 increase over 2011), plus an additional $5,500 if they?re over 50.

If you contribute on a pretax basis, your taxable income is reduced, which in turn lowers your taxes. At a minimum, if your employer offers matching contributions (essentially, free money), be sure to contribute at least enough to take full advantage of the match. This online calculator can help you estimate the impact additional contributions will have on your taxes.

Drain FSA balances. If you participate in employer-sponsored flexible spending accounts (FSAs), which let you use pretax dollars to pay for eligible healthcare and dependent care expenses, an important change is coming next year: Beginning January 1, 2013, the maximum annual contribution for healthcare FSAs will shrink to $2,500 from the $5,000 limit many employers currently offer; however, if your spouse has FSAs at work, you still may contribute up to $2,500 to each account. Dependent care account limits remain unchanged.

It?s vital to calculate and use any untapped 2012 account balances before your plan-year deadline (sometimes up to 75 days into the following year); otherwise, you?ll forfeit the remaining balance. If you have a surplus, consider which 2013 expenses you could pay before December 31, 2012. And, keep the new limit in mind when planning your 2013 healthcare FSA.

You can use your healthcare FSA for copayments, deductibles and medical devices such as glasses, contact lenses and braces, among other expenses; over-the-counter medicines are only eligible with a doctor?s prescription (an exception is made for insulin). ?Read IRS Publication 502 for a complete list of allowable and non-allowable expenses.

Charitable contributions. If you plan to itemize deductions on your 2012 taxes, charitable contributions made to IRS-approved organizations by December 31, 2012, are generally tax-deductible. (See the IRS?s Exempt Organizations Select Check to view eligible organizations.) If you?ve got extra cash now and want to lower your 2012 taxes even further, consider moving up donations you would have made in 2013.?

Energy tax credits. Unfortunately, many tax credits for energy-efficiency home improvements expired last year. But if you plan to make certain improvements, including installing geothermal heat pumps, residential wind turbines or solar energy systems, the tax credit lasts until at least December 31, 2016. This credit is for 30 percent of cost with no upper limit, and both existing and new-construction principal and second homes qualify. Review this Energy Star website for details.

Gifts. Unless Congress intervenes, the federal income tax exemption for estate distributions and lifetime gifts will drop from the 2012 limit ($5.12 million) to the pre-2011 level of $1 million (for married couples, it drops from $10.24 million to $2 million); in addition, the tax rate on gifts or estate distributions above those limits will increase from 35 percent in 2012 to 55 percent in 2013.

One way to exceed the lifetime gift limit ? and avoid having to file a Gift Tax Return ? is by giving separate, annual gifts of up to $13,000 per year, per person. (Married couples filing jointly can give $26,000 per recipient.) Note: The limit increases by $1,000 to $14,000 in 2013. Rules for gift and estate taxes are complex, so read IRS Publication 950 and consult your financial advisor.

Roth IRA conversion. People at any income level can convert part or all of their existing traditional IRAs or 401(k) plans from previous employers into a Roth IRA. Note that converted balances (for pretax savings and their earnings) get added to your taxable income, thereby increasing your taxes ? and possibly boosting you into a higher tax bracket for the year. However, if you?re a long way off from retirement, or believe that your income tax rate at retirement will be higher than it is today, such a conversion might make sense. Just make sure you don?t need to borrow money ? especially from a retirement account ? to pay for the additional tax burden today; otherwise you could undo the potential long-term tax advantage of converting to a Roth IRA.

This isn?t an ideal time to take on any additional tasks, but if some or all of these situations apply, you could considerably lower your tax bill. Wouldn?t that be a great way to start the New Year?

This?article is intended to provide general information and should not be considered legal, tax?or financial advice. It?s?always a good idea to consult a legal, tax?or financial advisor for specific information on how certain laws apply to you and about your individual financial situation.

To Follow Jason Alderman on Twitter: www.twitter.com/PracticalMoney

Jason Alderman is Senior Director, Global Financial Education, with Visa, Inc.

Views expressed are the personal views of the author, and do not represent the views of the National Foundation for Credit Counseling, its employees, its members, or its clients.

Source: http://financialeducation.nfcc.org/2012/12/21/last-minute-ways-to-trim-your-taxes/?utm_source=rss&utm_medium=rss&utm_campaign=last-minute-ways-to-trim-your-taxes

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