It's that time of year where if you haven't done some year end tax planning, you are sure to be behind the eight ball when it comes to saving as much money as you can with smart overall financial strategies. Every year about this time, the IRS puts out changes that will affect what happens when the new year begins. Here are some of the key things that you will want to know especially as you go through open enrollment season and assess your payroll deductions for the year ahead.
The IRS has increased the limitation on the maximum amount you can put away in 401(k), 403(b), and other types of retirement plans from $17,000 to $17,500. Depending on your marginal income tax rate (and where tax rates ultimately settle for 2013), this could save you several hundred dollars just by adjusting your percentage slightly up in your paycheck. If you are over 50 or turn 50 in 2013, you will still be eligible for the $5,500 catch up provision which means your total pre-tax deferral could be as much as $23,000. It's important to look at this in the very first paycheck you make during the year so you don't get too far behind and be sure to ask your benefits department if they 401(k) contribution percentage you choose will come out of your annual bonus and/or commission checks.
Many of you are wanting to continue to put money into a Roth IRA or start a Roth IRA. For married couples, the adjusted gross income limitation (AGI) moves to $188,000 in 2013 ($127,000) for singles. If your AGI is going to be below this level, you can put $5,000 into a Roth IRA (both spouses can do this) if you are under 50 and you can put away as much as $6,000 if you are over 50 due to the catch up rules. It's important to consider during the tax year whether you will still think about converting Traditional IRA's over to Roth IRA's depending on your income and overall tax rate. The key to this type of tax planning is having a long term strategy of different types of taxable money when you actually withdraw money down the road.
Since the holidays are coming up and you may have ongoing discussions with parents or grandparents about gifting, it is important to know that the annual amount that can be gifted (without gift tax) will go up to $14,000 per person in 2013. If you are married, your parents or grandparents can do $28,000 between the two of you since it is a per person rule. This could be an excellent way for your parents or grandparents to get money out of their estate. However, if those assets you are being gifted have substantial appreciation in them you will potentially have to pay income tax on the gifted asset (the appreciation) when you sell it down the road. This is why it is important to strategically select what is gifted to you in the planning process.
Flexible Spending Accounts at work normally had a $5,000 yearly cap for things such as dependent care or medical expenses. Effective January 1st, 2013, the rules change and the limit moves down to $2,500, so you should think about the potential tax consequence to you and your family if you were normally getting the full $5,000 tax deduction. FSA accounts are use or lose type of accounts and are different than Health Savings Accounts, so choose wisely on the amount you set aside in these plans.
I'm never really certain why most parents are completely bent on the idea that 529 plans are the best way to go for saving toward their children's college education. There are still accounts called Uniform Gifts To Minors Act (UGMA) and Uniform Transfer To Minors Act (UTMA) which can be very effective accounts. While there is some downside risk to your child taking over the account at the age of majority, the tax rules change in 2013 to allow up to $1,000 of tax free earnings through something called the 'kiddie tax'. I want you think for a moment how much money you have to have in an account today to earn $1,000 of interest. These accounts are something all parents should consider in conjunction with 529's or other vehicles.
These are just a few of the changes coming up in 2013. You will absolutely want to get with your Private CFO®, financial advisor, CPA, or whomever is working on your tax strategies before year end to plan for the upcoming adjustments for 2013. Those that have a smart money moves strategy can then focus their energies on the other side which is execution, and perhaps put a little bit of money back your pockets so holiday time in 2013 can afford you to do the things you want to do.
Visit oXYGenFinancial.net to request a consultation on how to make smart money moves for your future.
Ted Jenkin, CFP®, AAMS®, AWMA®, CRPC®, CMFC®, CRPS®
Co-CEO and Founder of oXYGen Financial, Inc - The Leaders in Gen X & Y Financial Advice and Services
Ted Jenkin is one of the foremost knowledgeable professionals in giving financial advice to the X and Y Generation.
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