Tax Tips To End 2012

I’ve been on a bit of a sabbatical the past two months or so. Planning to be back in January with my regular writing schedule, but I didn’t want to miss the chance to offer a year end article with some thoughts of ways to save before 2013 arrives.

• Did you turn 70-1/2 this year or are you already over this age? If so, you are obligated to take a withdrawal from your pre-tax retirement accounts, these Required Minimum Distributions (RMDs) must be taken by 12/31, else you face a horrific 50% penalty on the amount you should have withdrawn. Ouch.
• While you’re looking at that RMD, you might realize that this number will continue to rise each year, and that effect will only be magnified if your investments grow at a nice pace. This prompt the suggestion that a Roth conversion might be a good idea for you. The amount converted now is taxed at your current rate and might help avoid pushing you into a higher bracket in the future.

• Be sure to use up your remaining FSA (Flexible Spending Account) balance. This account let you put money aside, pre-tax to use for medical expenses that aren’t already covered by your insurance. Typically, this includes copays for doctor visits and prescribed medicine. Even a decent insurance plan won’t fully cover those designer glasses, so one good way to spend that last couple hundred dollars is to get your prescription updated, and get a new or extra pair of glasses.
• With all the talk of the fiscal cliff, there are some things that we simply don’t know about the 2013 tax code. Neither our tax rates nor the capital gain rate is finalized. This makes the usual advice of ‘harvesting losses’ a bit less valid. If you have realized long term gains, the maximum rate is 15%, but that potential loss you haven’t yet taken might be used to offset regular income next year. To be clear, I’m talking about the stock you still own but are considering selling to capture the loss. The two possible things it can offset are gains (either long or short term) or ordinary income. It would be a shame to get caught up in the idea of taking the loss that you only benefit by the 15% you save on the long term gain. Still, be aware that after offsetting stock gains, the losses apply to only $3000 of ordinary income, the rest carries forward.
• Is it time to adjust your withholdings? In an upcoming guest article (I’ll edit and link to it in a couple weeks) I’ll review how withholdings work and why you don’t want to lend Uncle Sam money interest free.
• Have you made your charitable contributions yet? For those who itemize their deductions, donations to charity give you back a bit of your donation at whatever your marginal tax rate is. Think of it as a rebate for your kindness.
• Every time I look at mortgage rates, I see they are in record territory, lower than the last record low. Even if your mortgage is under 5%, take the time to compare your current rate to the rate you can get on a refinance. There are no-cost deals out there, so if you have say $100K left on a mortgage at 5%, but can get it refinanced to 4% at no cost, that’s nearly $1000 in interest saved the first year. You’ll note, I ignore term here. Just pay the exact same amount you were paying each month, and the $1000 saved will go right to principal, making your mortgage shorter, a nice present to yourself a few years down the road.
• And last – no financial new year list would be complete without the suggestion to bump your savings. Among the Changes Coming in 2013  is the amount you can put into your 401(k) and IRA. It’s a good habit to bump your saving rate each year even if by only a percent.