It is that dreaded time of year again; it’s time to prepare our taxes, but smart preparation is always the key.
Dramatic tax increases scheduled to go into effect in 2013 make tax planning very important. The following taxes may be affected:
The Bush Administration tax cuts are set to expire, and a new 3.8% additional Medicare tax on investment income and a reduction of itemized deductions is also possible, which could raise the tax rate on income to as high as 44.6% for some taxpayers. However, these adverse tax consequences are by no means definite as Congress and President Obama could extend the Bush-era tax cuts for taxpayers. This would raise exemptions and availability of credits, renew some favorable expired tax rules and extend those that were due to expire at the end of 2012.
So, now is the time to take action. The prospect of higher taxes makes it even more important to engage in tax planning now. So what are some ways to go about that? The following might help.
1. Flexible spending account. Set aside more money for your employer's health FSA.
2. Make more HSA contributions. If you became eligible to make health savings account contributions late, you can still make a full year's worth of deductible HSA donations.
3. Make donations to Roth IRAs. IRA payouts are tax free and untouchable from the threat of higher tax rates with certain restrictions.
4. Converting traditional IRAs to Roth IRAs. Taking this measure will help to protect your money from a possible rise in tax rates.
5. Take necessary minimum distributions from retirement plans; this can be done if you are age 70 or above. Failure to take a mandatory withdrawal can result in a fee that is tacked on that is equal to 50% of the amount of the RMD not withdrawn.
6. Deducting your medical expenses. In 2012, unreimbursed medical expenses were deductible to the extent that they exceeded 7.5% of your Adjusted Gross Income or AGI, but this year, 2013, for individuals under the age of 65, these expenses will be deductible only to the extent they exceed 10% of AGI.
These ideas are just the beginning in creating an individual plan that will work for you. Whether you are planning for you, your family or business, preparation will be needed. If you feel that your tax preparation work will be more complicated that what you can manage yourself, be sure to speak with an accounting professional.
For tax planning in Phoenix, Arizona, head over to the experts at Jacobsen & Wactherhauser, PLC, a leading accounting firm that offers a combined 70 years of experience.