Hello and welcome to today’s live chat about year-end tax planning!
Joining us today is senior associate editor Sandra Block.
To get us started, can you tell us one thing all taxpayers should consider as 2012 comes to a close?
Unfortunately, year-end tax planning is difficult this year because so much is up in the air. We still don't know what tax rates will be next year, or what tax breaks will disappear. But you can still do things that make sense in any situation. One is to make sure you max out on your 401k. You can contribute up to $17,000 this year, or $22,500 if you're 50 or older. Good place for that year-end bonus!
Absolutely, Sandra. Always pay yourself first :)
You may also want to consider converting your traditional IRA to a Roth before year-end. You'll have to pay taxes on any pre-tax contributions or earnings you convert, but once you do it, your future earnings are tax-free (as long as you wait until you're 59 1/2 to take withdrawals). A good move if you think your tax rates are going to rise.
Another great tip. Just make sure you have enough money set aside now to pay the taxes on the conversion, right Sandra?
Yes, because it's rarely a good idea to take money out of your IRA to pay the tax bill. The good news is that you can change your mind. You have until Oct. 15, 2013 to undo the conversion and get rid of the tax bill.
That's great. So, if your tax rate doesn't end up increasing, you can always go back.
Alright, ready for our first question from Liza?
It depends on a number of factors. To qualify for a health savings account, you must enroll in a high-deductible health insurance plan. That means you'll need to pay a lot of money out of pocket before your insurance kicks in. You can use your health savings account to pay the deductible, but you need to have the discipline to fund it. Some employers will kick in some money, which makes an HSA more appealing. The other advantage of HSAs is that you can roll them over to future years, which isn't the case with flexible spending accounts. If you don't use all the money in your plan by year-end--or with employers, by March 31 of the following year, you forfeit it.
Do you know how high your deductible has to be in order to qualify for the tax break?
For 2012, a high deductible plan is one that has a deductible of at least $1,200 for an individual and $2,400 for a family plan. Not sure what the threshold will be in 2013.
Here's our next question from Maximizer
Trusts and clawback requirements are complex matters and you really need to sit down with an estate planning attorney to hash this out. Gifts must be irrevocable for the IRS to recognize them as such, and you don't want your mother giving away money she may need later. On this same subject, the lifetime estate tax exemption is scheduled to drop from $5.12 million to $1 million on Jan. 1 if Congress doesn't act. Families with large estates should meet with an attorney before year-end to review how this could affect their estate plans.
Great point. Thanks, Sandra.
Alright, here's another gift-giving question from CWCW
You can give as many people $13,000 as you like, and I don't think there are restrictions on what your recipient does with the money. I hope you trust your brother! Remember, too, that the clock starts all over again on Jan. 1, when the annual cut-off will rise to $14,000. So you could give your mother $13K this year and $14K next year.
Sounds like a pretty simple solution. Thanks!
Here's our next question from Timster
Depending on your income, you may qualify for a deductible IRA, but I'm wondering whether you'd be better off with a Roth. You contributions are after-tax, but future earnings are tax-free. If you're under 50, you can contribute up to $5,000 to a Roth this year; if you're over 50, you can save up to $6,000. And congratulations for resolving to save your raise!
Alright, here's a question from Brenda.
Brenda, as you noted, the American Opportunity Tax Credit is scheduled to expire at the end of the year. I think it's a popular tax credit but it's hard to predict whether it will be extended. If you can afford to prepay your daughter's college tuition--and haven't already exhausted the credit available to you for 2012--that would be a smart move.
Here's a Kiplinger's article with more information on the American Opportunity Tax Credit.
Too bad we don't have a crystal ball, Sandra!
Here's another question about Roth IRAs from Nicole.
Taxes make everyone's head spin, Nicole. The $5,000 limit on Roth IRAs doesn't apply to conversions. You can convert as much as you want, as long as you can afford to pay taxes on the amount you convert. If you have $11K, you could do a partial conversion, based on what you can afford, and convert the rest over the next few years. Since you are still years from retirement, you'll have many years of tax-free growth.
Vanguard has a calculator you can use to figure out how much you'll owe on a conversion.