Your Financial Planning To-Do List Before 2013

Make a charitable gift before New Year’s Day. You can claim the deduction on your 2012 return, provided you use Schedule A. The paper trail is important here.   If you give cash, you need to document it. Even small contributions need to be demonstrated by a bank record, payroll deduction record, credit card statement, or written communication from the charity with the date and amount. Incidentally, the IRS does not equate a pledge with a donation. If you pledge $2,000 to a charity in December but only end up gifting $500 before 2012 ends, you can only deduct $500.¹

Are you gifting appreciated securities? If you have owned them for more than a year, you will be in line to take a deduction for 100% of their fair market value and avoid capital gains tax that would have resulted from simply selling the stock, fund or bond and then donating those proceeds. (Of course, if your investment is a loser, then it might be better to sell it and donate the money so you can claim a loss on the sale and deduct a charitable contribution equivalent to the proceeds.)¹

Does the value of your gift exceed $250? It may, and if you gift that amount or larger to a qualified charitable organization, you will need a receipt or a detailed verification form from the charity. You also have to file Form 8283 when your total deduction for non-cash contributions or property in a year exceeds $500.¹   If you aren’t sure if an organization is eligible to receive charitable gifts, check it out at www.irs.gov/Charities-&-Non-Profits/Exempt-Organizations-Select-Check.

Contribute more to your retirement plan. If you haven’t turned 70½ and you participate in a traditional (i.e., non-Roth) qualified retirement plan or have a traditional IRA, you can reduce your 2012 taxable income by the amount of your contribution. If you are self-employed and don’t have a solo 401(k), a SIMPLE plan or something similar, consider establishing and funding one before the end of the year. Also, keep in mind that your 2012 tax year contribution to an IRA or solo 401(k) may be made as late as April 15, 2013 (or October 15, 2013 if you file Form 4868).²

In 2012, you can contribute up to $17,000 in a 401(k), 403(b) or profit-sharing plan, with a $5,500 catch-up contribution also allowed if you are age 50 or older. You can put up to $11,500 in a SIMPLE IRA in 2012, $14,000 if you are 50 or older.³

Additionally if you’re a business owner make sure you effectively evaluate that your company retirement plan(s) provide maximum benefits to both your employees and YOU.   

Make a capital purchase. If you buy assets for your business that have a useful life of more than one year – a truck, a computer, furniture, a rototiller, whatever – those purchases are commonly characterized as capital expenses. For 2012, the Section 179 deduction can be as much as $139,000 (although it is ultimately limited to your net taxable business income). First-year bonus depreciation is set at 50% for most purchases of new equipment and software in 2012. The way it looks now, the 2013 deductions may be much less generous.^2,4  

Open an HSA. If you work for yourself or have a very small business, you may pay for your own health coverage. By establishing and funding a Health Savings Account in 2012, you could make fully deductible HSA contributions of up to $3,100 (singles) or $6,250 (married couples). Catch-up contributions are allowed if you are 50 or older.²  

Practice tax loss harvesting. You could sell underperforming stocks in your portfolio – enough to rack up at least $3,000 in capital losses. If it ends up that your total capital losses top all of your capital gains in 2012, you can deduct up to $3,000 of capital losses from your 2012 ordinary income. If you have over $3,000 in capital losses, the excess rolls over into 2013.²

Are there other major moves that you should consider? Your to-do list might be long, for much financial change may occur in 2013…  

Pay attention to asset location. Here are two big reasons why tax efficiency should be a priority as 2012 leads into 2013:   Next year, dividend income is slated to be taxed as regular income. So tax on qualified stock dividends could nearly triple for the wealthiest Americans.

Capital gains taxes for high earners are scheduled to jump 33% in 2013. Long-term capital gains are now taxed at 15% for those in the highest four income brackets; that rate is supposed to rise to 20% next year.⁵  

Can you contribute the maximum to your IRA on January 1? The rationale behind this is that the sooner you make your contribution, the more interest those assets will earn. If you haven’t made your 2012 IRA contribution, you still have until April 15, 2013 to do that.⁶

In 2012 you can contribute up to $5,000 to a Roth or traditional IRA if you are age 49 or younger, and up to $6,000 if you are age 50 and older (though your MAGI may affect how much you can put into a Roth IRA).³

What are the income limits on tax deductions for traditional IRA contributions? If you participate in a workplace retirement plan, the 2012 MAGI phase-out ranges are $58,000-68,000 for singles and heads of households and $92,000-112,000 for couples.³  

Should you go Roth before 2013 gets here? We all know federal taxes are poised to rise next year, but one little detail isn’t getting enough publicity: the planned 3.8% Medicare surtax scheduled to hit single/joint filers with AGIs over $200,000/$250,000 will not apply to qualified payouts from Roth accounts.⁷

MAGI phase-out limits affect Roth IRA contributions. In 2012, phase-outs kick in at $173,000 for joint filers and $110,000 for single filers. Should your MAGI prevent you from contributing to a Roth IRA at all, you still have a chance to contribute to a traditional IRA in 2012 and then roll those assets over into a Roth.⁷

Consult a tax or financial professional before you make any IRA moves to see how it may affect your overall financial picture. If you have a large traditional IRA, the projected tax resulting from the conversion may make you think twice.  

There are some other important areas to consider in 2013  

Payroll taxes are slated to increase 2% next year. The payroll tax cut of 2011-12 has slim chance of extending into 2013. The maximum payroll tax paid by high earners is slated to be $7049.40 next year, $2,425 above 2012 levels. That isn’t just because Social Security taxes for employees are returning to the 6.2% level; it also reflects a 3.3% increase in the upper salary limit subject to the tax to $113,700.⁸

Review your withholding status. Aside from the presumed end of the payroll tax holiday, there are other reasons you may want to adjust your withholding status.

If you are retired and older than 70½, remember your RMD. Retirees over age 70½ must take Required Minimum Distributions from traditional IRAs and Roth 401(k)s and all employer-sponsored retirement plans by December 31, 2013. The IRS penalty for failing to take an RMD equals 50% of the RMD amount.⁹

If you have turned or will turn 70½ in 2012, you can postpone your first IRA RMD until April 1, 2013. The downside of that is that you will have to take two IRA RMDs next year, both taxable events – you will have to make your 2012 tax year withdrawal by April 1, 2013 and your 2013 tax year withdrawal by December 31, 2013.⁹

Plan your RMDs wisely. If you do so, you may end up limiting or avoiding possible taxes on your Social Security income. Some Social Security recipients don’t know about the “provisional income” rule – if your modified AGI plus 50% of your Social Security benefits surpasses a certain level, then a portion of your Social Security benefits become taxable. For tax year 2012, Social Security benefits start to be taxed at provisional income levels of $32,000 for joint filers and $25,000 for single filers.¹⁰  

Consider the tax impact of any 2012 transactions. Did you sell real property this year – or do you plan to before 2012 ends? Did you start a business? Are you thinking about exercising a stock option? Could any large commissions or bonuses come your way before January? Did you sell an investment held outside of a tax-deferred account? Any of this might significantly affect your 2012 taxes.  

Would it be worth making a 13th mortgage payment this year? If your house is underwater, there’s no sense in doing it – and you could also argue that the dollars might be better off invested or put in your emergency fund. Those factors aside, however, there may be some merit to making a January mortgage payment in December. If you have a fixed-rate loan, a lump sum payment can reduce the principal and the total interest paid on it by that much more.  

Are you marrying in 2013? If so, why not review the beneficiaries of your workplace retirement plan account, your IRA, and other assets? In light of your marriage, you may want to make changes to the relevant beneficiary forms. The same goes for your insurance coverage. If you will have a new last name in 2013, you will need a new Social Security card. Additionally, you and your spouse no doubt have individually particular retirement saving and investment strategies. Will they need to be revised or adjusted with marriage?  

Are you coming home from active duty? If so, go ahead and check the status of your credit, and the state of any tax and legal proceedings that might have been preempted by your orders. Make sure your employee health insurance is still there, and revoke any power of attorney you may have granted to another person.   Decide to focus on being healthy and wealthy in the New Year and consider talking with a financial and tax professional for a little additional wisdom.  

Citations

1 – news.cincinnati.com/article/20120919/BIZ/309190108/Businesswise-Make-most-charitable-contributions

2 – www.inman.com/buyers-sellers/columnists/stephen-fishman/5-things-you-can-do-now-lower-your-2012-tax-bill

3 – www.irs.gov/Retirement-Plans/COLA-Increases-for-Dollar-Limitations-on-Benefits-and-Contributions

4 – www.bkd.com/articles/2012/tax-depreciation-changes-coming-in-2013.htm

5 – www.thenewstribune.com/2012/10/02/2317249/consider-selling-investments-soon.html

6 – www.sacbee.com/2012/09/28/4862291/tax-help-program-needs-volunteers.html

7 – online.wsj.com/article/SB10001424052702304072004577325551162426954.html

8 – www.forbes.com/sites/janetnovack/2012/10/16/social-security-benefits-to-rise-1-7-workers-face-up-to-2425-payroll-tax-hike/

9 – www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-Required-Minimum-Distributions#2 

10 – www.socialsecurity.gov/planners/taxes.htm

About the author:

Walid Petiri is a Registered Investment Advisor. His nearly two decades of financial experience covers virtually all areas of finance from tax, insurance, stockbroker, personal financial planning and personal banking to corporate credit, business planning and consumer lending. His career positions include MBNA America Bank, the Internal Revenue Service and American Express Financial Advisors, Inc.

Walid is a graduate of New Jersey’s Montclair State University with a degree in both business management and finance. Mr. Petiri is a recipient of the Accredited Asset Management Specialist designation from the College of Financial Planning in Denver, Colorado. He is also a Registered Financial Consultant and select member of the International Association of Registered Financial Consultants, an organization of professional financial advisors who are required to maintain a high standard of education, experience and integrity.