Tax rates will rise, the exemption from the estate tax will shrink and dozens of tax breaks will disappear unless Congress acts to reinstate them by Dec. 31. With that in mind, your best bet is to focus on tactics that will trim your tax bill no matter what Congress does.
• Max out on your tax-deferred retirement savings plans. You can still contribute up to $17,000 to your 401(k) or other employer-based plan for 2012; if you’re 50 or older, you can contribute up to $22,500. Contributing the full amount is a smart strategy if you plan to convert a traditional IRA to a Roth because it will lower your taxable income. You can stash up to $5,000 ($6,000 if you’re 50 or older) in an IRA, and you have until April 15, 2013, to make 2012 contributions. Contributions to a traditional IRA may be tax-deductible.
• Make gifts before year-end. Barring action by Congress, the estate-tax and lifetime gift-tax exemption will drop to $1 million, from $5.12 million. Plus, the maximum estate-tax rate will jump from 35 percent to 55 percent.
That doesn’t mean you should start handing out big checks to your children and grandchildren. Gifts must be irrevocable (otherwise, the IRS doesn’t consider them gifts). But if you have more than $1 million in assets, you should review your estate plan before year’s end, says Irvin Schorsch, president of Pennsylvania Capital Management. Talk to an estate-planning lawyer about setting up trusts and other vehicles that will allow you to take advantage of the current exemption to transfer wealth to your children or grandchildren. You can give $13,000 to as many individuals as you like, tax-free; if you’re married, you and your spouse can give $26,000 per recipient.
• Postpone a required minimum distribution for as long as possible. A tax break that allowed individuals age 701/2 to send tax-free distributions of up to $100,000 from their IRAs directly to charity expired at the end of 2011. Congress has extended this tax break several times and may do so again for 2012. If you want to take advantage of this provision, hold off as long as you can on your distributions. If you take a taxable distribution from your IRA, you can’t put it back and ask your custodian to make a direct contribution to charity. Just don’t wait past mid-December to give instructions to your IRA custodian. Failure to take an RMD by year-end could trigger a penalty of 50 percent of the amount you were supposed to withdraw.
Sandra Block is a senior associate editor at Kiplinger’s Personal Finance magazine. Send your questions and comments to moneypower@kiplinger.com. Kiplinger’s has a new service to pinpoint the ideal time to claim Social Security to maximize benefits. Visit kiplinger.socialsecuritysolutions.com.
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