Are You Ready for Some Tax Planning?


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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.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Copyright © 2010 FPA All Rights Reserved

This article appears in: Personal Finance , Taxes

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