How can you reduce your annual tax liability? This is always a question on everyone’s mind. Opportunities exist year-round to minimize your overall tax bill.
Bunching Deductions or Deferring Income
Take a look at your deductions this year. Are there some that you could accelerate to provide tax savings? If you had significant medical expenses (not reimbursed), and know of other medical expenses you must incur next year, consider spending the money sooner than later. For example, if you know your annual eye exam or dental visit is due early next year, make the appointments for this year. Remember, only medical expenses in excess of 7.5% of your adjusted gross income are deductible.
Other deductions that you could accelerate include charitable contributions, state and local property taxes paid by year-end, and mortgage interest paid and credited by the lender as of the end of the year.
Income deferral techniques exist for many individuals. Consider funding your retirement plan. An individual with earned income can contribute up to $5,000 to a Traditional IRA ($10,000 total for the taxpayer and spouse). If you are age 50 or older, you may be eligible to make an additional “catch-up contribution” of $1,000. The contributions are deductible from income if certain income limitations and other criteria are met. You have until the tax filing deadline next year to make the contributions.
A self-employed individual can also fund their retirement through various plans, such as, a SEP or Keogh. Contributions of up to 25% of net income can be contributed for the year. The maximum contributions for 2012 are $50,000, depending on the type of plan.
A self-employed person could delay invoicing clients until January. If the taxpayer operates on a cash-basis (taxed on income when the money is received), then the income would not be taxable until next year.
Other income deferral strategies include delaying the exercise of non-qualified stock options, Roth IRA conversions, and capital gain strategies.
Tax Loss Sales
Take a look at your investment portfolio. Given the sharp decline we have seen in many stock values and other securities, does it make sense to sell some of the losers at a loss? Suppose that you have capital gains of $20,000 from the sale of Stock A. Your tax liability would be $3,000, assuming this was a long-term gain taxed at 15%. Now, suppose that Stock B, held in your portfolio, has dropped sharply in value since you purchased the stock. If you sell this stock at a loss of $20,000 to offset the gain from Stock A, your net profit for the year would be zero and your capital gains tax would be zero. A word of caution to those who sell stock for tax losses: If you intend to repurchase the stock, wait at least 31 days; otherwise, the tax loss will be disallowed.
A nice feature of capital losses is that up to $3,000 in losses may be used to reduce ordinary income, such as, your salary or wages. Losses in excess of $3,000 are carried forward to future years.
First, remember the overall objectives of your investment portfolio. Only consider tax loss sales if it makes sense for your investment strategy. Tax implications should never be the guiding factor in managing your portfolio. Of course, the tax effect of each investment transaction should never be ignored.
Planning now and throughout the year can reduce your tax liability. For more information contact Henssler Financial at 770-429-9166 or at experts@henssler.com
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
