December 31st is quickly approaching, and none of us knows exactly what Congress will do when it comes to taxes. Many tax advisors suggest that we plan for the worst and assume that our tax liabilities will rise come January 1st. Here are some tax moves that might benefit you.
Set up an HSA. An HSA, or Health Savings Accounts, is a special savings account funded with pre-tax dollars. Funds can only be used for qualifying medical expenses. Anyone with a high deductible health plan (HDHP) may open an HSA. Currently, HDHP means a plan with a deductible of at least $1,200 (individual) or $2,400 (family). Bonus – you can set up the HSA now, but contribute to it anytime before April 15, 2013 for the 2012 deduction.
Sell a profitable stock. If you’re in the bottom two tax brackets, you can take advantage of a zero percent long-term capital gains tax (on investments that you have held for one year or longer). This holds true even for married couples, so long as one spouse’s income remains in the lower two tax brackets. Even if the other spouse has very high earnings, so long as they file separately, the low income spouse can take advantage of this break.
If you’re not looking at a zero percent gains tax now (because you’re in a higher income bracket), don’t rush to sell. A tax hit now is a tax hit now, notwithstanding the chance of an as yet unknown bigger tax hit later. And if you’re planning to hold the asset for five years or longer, the tax increase could be a wash when compared to the earnings on that asset.
Max out your retirement account contributions. This is a no-brainer. You’ll increase the value of your retirement portfolio – with pre-tax dollars – and lower your tax burden now. If you have a 401(k), you must make your contributions before the end of the year.
Donate to charity. This is pretty standard advice every year, but 2013 could see a reduction in benefits for charitable giving. For now, your charitable gifts may be deductible up to half of your adjusted gross income, and disallowed portions can often be carried over to future years.
Make an extra mortgage payment. The mortgage interest deduction could go away, but you can squeeze in one extra payment before that happens. Also, reducing your principle now will reduce the interest you pay later, when that interest is no longer deductible.
Spend the money in your medical FSA. FSAs, or Flexible Savings Accounts, are set up by employers. They allow the employee to set aside pre-tax money for qualified medical expenses, like doctor visit co-pays and prescription medications. According to IRS rules, any money left in the account beyond the spend-by date will be forfeited. Some accounts allow expenditures in 2013, others are cut off on December 31st. Check with your employer or benefits administrator.
Give a cash gift or forgive a loan, up to $13,000, tax-free. The number of friends and family you can offer this amount to is currently unlimited.
Act fast, as many of these tips require some paperwork.
Kimberly Rotter is a writer, businesswoman and mother in San Diego, CA. She holds a Bachelor’s degree in English, a Master’s degree in Business Administration, and a Graduate Certificate in Distance Education. Kim and her husband own two homes, a couple of vehicles and a few investments, and live with minimal debt. Both are successfully self-employed, each in their own field.