While we are all awaiting to see what Congress does to deal
with our tax rates for 2012 and 2013, I thought it would be
good to deal with some practical tax planning that will work
for you regardless of what Congress does with all the tax
issues they need to address. (I will write about the tax
changes they make once we know what those are.)
Let's start with how we can reduce our tax liability by
using our Schedule A-type itemized deductions to help us over
several years. All tax payers get to use the standard deduction
or to itemize for certain items as a choice. For instance, we
can claim a standard deduction of $5,950 if we are Single or
Married Filing Separately or $11,900 if we are filing as
Married Filing Jointly (MFJ). If we are 65 and older, the
amount is increased by $1,450 if Single and by $1,150 for MFJ.
So if both taxpayers are over age 65 and MFJ, the standard
deduction is now $14,200 and if both were disabled the amount
goes up to $15,500.
For many taxpayers, the ability to itemize and exceed these
limits rests on whether they have a mortgage and own a house
(real estate taxes). Without these two items, your ability to
itemize is reduced unless you have high medical expenses or
make charitable contributions. In some cases, you barely get
over the standard amount allowed with what deductions you do
have. So this article is meant for people who do not have
enough to itemize or barely get over the limits each year.
If you are below the limit or barely over each year, you may
want to look at how you pay things like real estate property
taxes. In some states (Michigan is one), you receive two real
estate tax each year with one of them due in the early part of
the year. This gives you the option of paying it in December or
in January, thus the opportunity for some tax planning. If you
are not able to get the advantage of itemizing this year, you
could wait and pay this tax bill in January 2013 and then plan
on paying the December 2013/January 2014 bill in December of
2014.
Assuming the above might work for you, the next item would
be to look at your charitable contributions. If you were going
to postpone the real estate bill to January 2013, then you
might also wait until January 2013 to write those year-end
checks to charities. Should this become your plan for this
December, then put a note on your calendar that next December
you will write the charity donation checks in December to again
double up on the donation items for 2014. This also works for
those donated articles of clothing and other items that you
drop off periodically at places that take donated items. Just
remember to make that detailed list of the items donated, maybe
take a picture for documentation purposes, get your receipt
from the charity, and then make the right value of each item
for tax purposes. For those checks you wrote, be sure to get a
receipt from the charity for amounts over $250.
Now let's move on to medical expenses. As you know, medical
expenses need to exceed 7.5% of your adjusted gross income
before you can take any medical expense deduction. This
exclusion amount is going up to 10% in 2013, so you may want to
look at getting some health care needs met in 2012 in order to
help get this deduction. Examples of year-end health care might
be a dental checkup, eye glass exams and new glasses, and
filling prescriptions in December that you might normally fill
in early January. I am not suggesting spending money without a
reason, but many times we might have exams in the first quarter
of the year that could be performed in December. Remember if
you put the amount you are responsible for on your credit in
December, it is considered paid for tax purposes even though
you may not pay the credit card balance until next year. If you
have a medical expense deduction for tax purposes, be sure to
count up the miles that you incurred to get that medical
treatment at round trip miles including to pick up your
prescriptions and doctor office visits ($.23 per mile is what
is allowed for medical miles in 2012).
This plan for itemizing one year and using the standard
deduction in the next year should result in you claiming more
over the two years than you would have claimed by not doing
this planning. For instance, let's assume you are Single and
under age 65 with a standard deduction amount of $5,950 and
your itemized deductions were normally $6,500 each year. With
no planning you would be taking the $6,500 each year. You do
your analysis and you find that there is $1,000 of the $6,500
that you can control as to when you pay out this money and thus
get the tax deduction. So for the first year you take the
standard deduction of$5,950 and in the second year you have
$7,500 of itemized deduction for a total of $13,450 over the
two years. This is $450 more than what you claimed by itemizing
each year, saving you $68 in taxes if you are in the 15% tax
bracket. Now that is tax planning and you get rewarded for this
great planning.
To your list of things that you can do to move deductions
from one year to the next, add making estimated tax deposit for
state income taxes you know you will owe when the tax return is
due (make the deposit in December 2012 rather than January
2013.) Make your January 2013 mortgage payment so you can claim
an extra month's mortgage interest each year.
For your charitable contributions, if you give stocks or
mutual funds that have a huge capital gain to the charity, you
get to claim the current market value rather than what you paid
for the stock as the donation, just be sure to transfer the
stock certificate rather than selling it. If you sell it first
then you have the gain and the tax bill.
After the Schedule A items, your next stop is to look
closely at your taxable investment portfolio to see how each
investment is doing as it relates to what you paid for it
originally. While we want all of our investments to grow, it
would be unrealistic to think they are all worth more than what
we paid for them. So consider harvesting the ones with loses,
because you can take $3,000 of losses each year against your
other income and that will reduce your taxable income with the
tax bill going down by $450 if you are in the 15% tax
bracket.
Finally, if these two ideas can reduce your taxable income
enough to keep you in the 15% tax bracket, then any dividend
income for 2012 will get taxed at Zero% versus 15% if you
should end up in the 25% tax bracket.