The staff of Boomerang thank Ben Skinner, of Summit Financial Strategies, Inc., for contributing this article.
As the year comes to an end, your thoughts may turn to holiday preparations and celebrations with family and friends. But, before you ring in the New Year, here are a few end-of-the-year, tax-friendly savings tips to consider.
401(k), 403(b), 457 Deferrals - You may want to increase contributions to your employer-sponsored retirement plan before the end of the year, particularly if you will receive a bonus paycheck. Not only is it a good way to save for later in life, but you also may reduce your 2012 tax liability as a result. You may defer up to $17,000 in 2012 with an additional $5,500 catch-up contribution for those age 50 or older.
College Savings - Ohio has a very good 529 college savings program and gives its residents an incentive to contribute. Contributions of up to $2,000 per beneficiary may be deducted from state taxable income per calendar year. Unused deductions for contributions may be carried over into future years. These are not strictly for building a newborn's future education fund; you may use this strategy to fund a current student's education or save toward college classes that you intend to take yourself.
Charitable Giving - Dec. 31 is the last day to make charitable donations of cash or highly appreciated securities (such as mutual funds, stocks or bonds) for the 2012 tax year. A popular charitable giving strategy is to use a Donor Advised (or Charitable Gift) Fund to build up an account for future years' charitable giving. With this approach, you receive the tax benefit in the taxable year in which the account is funded and direct gifts to charitable institutions when you see fit in future years. Cleaning out your garage or closet can lead to non-cash donations. Goodwill, Habitat for Humanity ReStore and Salvation Army are just a few locations that will accept your donations of clothing, furniture, and household goods. Be sure to document the items given and appropriate values for tax reporting.
ROTH IRA Conversion - Given the possible rising tax environment, it may be beneficial (depending on your current tax bracket) to recognize income from a regular IRA by converting it to a ROTH IRA. You will have to recognize taxable income and pay taxes on the money you convert this taxable year. However, the assets in your ROTH IRA grow tax-free, will not be subject to Required Minimum Distributions at age 70½ and, best of all, withdrawals are TAX-FREE! Consult with your financial or tax advisor to discuss your personal situation. If you need a financial advisor, the National Association of Personal Financial Advisors is an excellent resource of independent advisors.
IRA Contributions - The reason this is the last tip on the list is that there is no need to rush. You have until April 15, 2013 to make your IRA or Roth IRA contribution for the 2012 tax year. The maximum contribution amount is $5,000, with an additional $1,000 catch-up contribution for those ages 50 or older. Contributions may only be made if you or your spouse have earned income. There are income limitations for deductible IRA and ROTH IRA contributions. For more detailed information, refer to the IRS website or consult your tax advisor.
A parting piece of advice is to thoroughly document your financial and medical records prior to the end of the year in order for your time at the accountant's office or kitchen table to be less stressful when preparing your 2012 tax returns.
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