Going down to the wire is business as usual in Washington D.C. Given that the implications of the “Fiscal Cliff” decisions will set the course for years to come; it’s important to get it correct, although some elected officials fear that the base will have them drawn and quartered because of their decisions, the Nation as a whole has priority over a few individuals. It’s not all about taxes either; Government spending absolutely has to be addressed as well. It’s just as important. A large number of Americans receive benefits of one sort or another. You’re fooling yourself if these folks won’t rise up in rage if their entitlements are ‘adjusted’. Again, the Nation as a whole has priority over the few. With so little factual information being stated in the media about how this can affect you and your personal economy, I’ve assembled a few points that should clear some of the fog away for you.
Don’t leave Free money on the table
With a great deal of uncertainty regarding the current economic situation, many employees have put off contributions to their retirement accounts, thinking that they will make up lost ground when the situation improves. Unfortunately, using that reasoning could result in leaving what is virtually “free” money on the table. If you have a 401(k) or an equivalent retirement account where your employer matches your contributions always contribute enough each year to receive your complete employer match. Taking full advantage of an employer match is the best no-risk return you will absolutely ever find.
If you are over 70 ½…
You must take a required minimum distribution from your traditional IRA account(s) by year-end. Not doing so could result in a 50% excise tax on the amount required, but not actually withdrawn. If you turned 70½ during 2012, you have some flexibility. You can take your 2012 distribution by December 31st or you could delay it until April 1st of 2013. If you decide on the latter, you still must make your 2013 distribution by December 31, 2013, resulting in two distributions during the 2013 calendar year. Every year after that, the distributions must be made by year-end.
Converting your Traditional IRA to Roth IRA?
If you are considering converting your Traditional IRA to a Roth IRA and will be paying taxes to convert, make that conversion in 2012 while you know what your tax rate will be. With the Bush tax cuts expiring and new taxes beginning to take effect in 2013, there’s a chance it could cost you more to convert next year.
Fund your self-employment retirement accounts!
If you have self-employment income and are eligible to set up an Individual 401k plan or Roth 401k plan, those plans must be established by December 31st, even though you will have until your tax deadline in 2013 to fund the account.
Planning on giving it away?
So you may think that you can give away your money as you please, unfortunately the federal government has a tendency to look at excessive gifting as estate tax evasion. Currently, you can gift up to $5 million ($10 million for couples) over your lifetime without incurring federal gift taxes of 35%. The maximum you can give one person each year without tax implications is $13,000 ($26,000 for couples.) This may well change in 2013, but for now, if you intend to make non-charitable monetary gifts, do it before the end of 2012.
If you expect to be paying higher income taxes in 2013, you might want to look at postponing paying deductible expenses to push them into next year to reduce your taxable income. There’s the risk that what is deductible in 2012 may change in 2013.
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Consult your tax adviser
Before the end of the year, we should have some clarity on some of the tax changes to expect in 2013. That makes it principally important to talk with your tax adviser and find out if you are able to minimize the tax circumstances as much as possible.
Dempster R. “Bobby” Cherry, is a Financial Advisor with Nelson Securities, Inc.