The amount you can contribute to your retirement plan increases in 2013. The 401(k) maximum salary deferral increases from the 2012 limit of $17,000 to $17,500. The catch-up limit for those 50 and older remains unchanged at $5,500. The maximum deferral for a SIMPLE increases from the 2012 limit of $11,500 to $12,000. The catch-up limit for 50 and older remains at $2,500. The 2013 maximum IRA contribution increases from the 2012 limit of $5,000 to $5,500. If you’re 50 or older, your IRA contribution limit is $6,500.
If you did not contribute the 2012 maximum to your IRA by December 31, 2012, and you make any IRA contributions before April 15, 2013, tell your bank or other trustee that these 2013 contributions are for 2012 until you reach the $5,000 limit ($6,000 if you’re 50 or older). You can then deduct these 2013 amounts on your 2012 tax return for a quicker tax benefit. For details, contact us.
* October 15 is the final filing deadline for extended 2011 individual income tax returns.
* October 15 is the deadline for undoing a 2011 conversion of a regular IRA to a Roth IRA without penalty.
* The Congressional Research Service reports that 34 million taxpayers could be hit by the alternative minimum tax this year.
* Time is running out for using your 2012 annual gift tax exclusion. You can give up to $13,000 per individual without paying any gift tax.
* The most fundamental year-end move to cut your taxes is to adjust the timing of income and deductions. See us for details.
Consider a Roth IRA if you qualify for one. The beauty of a Roth is that your investment grows tax-free, and qualified withdrawals from a Roth will be completely tax-free. Contact our office for more information.
As a boss, you may hire family members and pay reasonable salaries for the work they do in your business.
For example, you could hire your son or daughter to perform routine clerical or cleanup tasks. Your child’s salary would be a tax-deductible business expense, and your child’s income would be tax-free up to that year’s standard deduction amount for a single taxpayer ($5,950 for 2012). Wages in excess of that amount would be taxed at your child’s rates, which are probably lower than yours.
You can compound the benefits of this strategy by having your child contribute to an IRA, which is likely to enjoy many years of tax-deferred growth.
Wages paid to a spouse by a sole proprietor are subject to payroll taxes; those paid to your children who are under the age of 18 are not. Compensation paid has to be reasonable for the services performed.
Sticking to the rules when making charitable contributions can save tax dollars. Here are three tips.
* Recordkeeping is vital if you want to be able to deduct a contribution to charity.
What records do you need? For starters, to claim an itemized deduction, you’re required to have support for all cash contributions, no matter what the amount. A bank statement, a copy of the cancelled check, or a credit card record will usually suffice for donations under $250. For donations of $250 or more, a statement from the charity is required, giving the charity’s name, the date, the amount of your donation, and the value of goods and services received for the donation, if any. In the case of payroll donations, your pay stub or W-2 can back up your deduction.
The substantiation rules for noncash donations such as household items differ depending on the type of property and its value. For instance, you’ll need a contemporaneous written acknowledgment from the charity for donations of $250 or more. As a general rule, “contemporaneous” means you receive the acknowledgment before you file your return or before the due date of your return, whichever is earlier.
* Make a gift from your IRA. The break allowing a transfer of up to $100,000 from your IRA to a qualified charity is available for 2011. To benefit, you must be over age 70½, and the contribution has to be a direct payment from your IRA to the charitable organization.
* Write down your vehicle mileage for charitable driving. Written records rule, whether you claim the standard mileage deduction of 14¢ a mile or actual expenses. Make sure your log or other paperwork includes the name of the charity, the date, and the miles you drove or the total cost you incurred.
Please call for advice on getting the most benefit from your donations, including appreciated property and out-of-pocket expenses.
Would you like to shave $1,000 off your income tax bill? Would your spouse like to join in the tax savings of up to $2,000 on a joint return? This potential savings comes in the form of a tax credit called the “retirement savings contributions credit” or “saver’s credit.” Unlike a tax deduction, a tax credit is a dollar for dollar reduction of the taxes you owe.
How do you qualify for this credit? By contributing to a retirement plan, you could be eligible for the saver’s credit. This includes contributions to both Roth and traditional IRAs. It also includes salary deferrals into SEP, SIMPLE, 401(k), 403(b), and 457 plans.
How much is the credit? The credit ranges from 10% to 50% of the first $2,000 contributed to a retirement plan. In other words, the maximum credit is $1,000 for an individual. If you and your spouse both contribute at least $2,000 to your retirement accounts, you could qualify for up to a $2,000 credit on a joint return.
Are there limitations? Like many tax breaks, this credit decreases or phases out entirely once your income reaches certain levels. The credit is not available if 2011 income exceeds $28,250 for individuals, $42,375 for heads of household, and $56,500 for married couples filing a joint return. In addition, you cannot take the credit if you are under age 18, a full-time student, or someone else’s dependent.
Here’s an example. Say you put $3,000 into an IRA and you qualify for the maximum $1,000 saver’s credit. You can deduct your $3,000 contribution for a tax savings of $450 ($3,000 x 15% tax rate). Add this $450 tax savings to the $1,000 saver’s credit, and your total tax savings equals $1,450.
If you haven’t been contributing to a retirement plan, this tax credit adds yet another incentive to do so. You have until April 16, 2012, to make a 2011 IRA contribution that could reduce your 2011 taxes. For more information about the saver’s credit or about retirement accounts, contact our office.
Here’s an overview of three common concerns:
* Is a tax return required? The answer depends on several factors, including the total amount of income received. For instance, if wages are the only source of income, your child can generally earn up to $5,800 during 2011 before a federal tax return is necessary.
However, unless your child can claim an exemption from withholding, a return may be required even when wages earned are lower than the filing requirement. That’s because filing is the only way to claim a refund of overpaid taxes. In addition, self-employment income, tips, and interest, dividends, and stock sales can affect the filing requirement.
* Can my child open an IRA? Anyone under age 70½ who has earned income can contribute to a traditional IRA. There’s no age restriction for Roth accounts, though the amount of the contribution phases out at higher income levels (starting at $107,000 for single individuals in 2011).
If your child will receive a federal income tax refund, you could choose to have it deposited directly into an IRA account. As an alternative, you can provide the funds for an IRA and let your child keep the refund. The maximum standard contribution for 2011 is $5,000.
* Are there any tax breaks if my child works for me? You can take a business tax deduction when you pay a reasonable wage for work your child performs in your sole proprietorship or a partnership you and your spouse operate. In addition, as long as your child is under age 18, you don’t have to pay social security, Medicare or federal unemployment taxes. The wages are subject to income taxes.
If you have other questions about the tax implications of a summer job, give us a call. We’re happy to help.
The option to make a qualified charitable distribution from your Roth or traditional IRA is once again available for 2010 and 2011. And even though 2010 is officially over, you can take advantage of a special rule that treats a distribution taken in January 2011 as if you made it in 2010.
Here’s a refresher on how the IRA charitable distribution works.
* You must be age 70½ or older at the time of the distribution.
* The distribution can come from your traditional and Roth IRAs, but not from SEP or SIMPLE retirement plans.
* The distribution must be made directly from your IRA to an eligible charity. Donor advised funds are not eligible recipients.
* The distribution will count as part of your required minimum distribution. You can elect to have a distribution made in January 2011 applied to your 2010 RMD.
* You can exclude the contribution from your taxable income, though you won’t be able to take an itemized deduction for it.
* The maximum amount you can exclude from income as a qualified charitable distribution is $100,000. When you’re married filing jointly, the limit applies to each of you separately.
Please call if you’re thinking of donating money from your IRA to charity. We’ll be happy to help you make sure the transfer stays within the rules.
There are many changes in the tax rules this year, with the promise of much more to come. Here are some of the 2010 changes that could affect you.
* Deductions. The 2001 tax law gradually restored the full deduction for personal exemptions and itemized deductions for higher-income taxpayers. Effective this year, high-income taxpayers are entitled to the full $3,650 deduction for each personal exemption they take, and there will be no income-based reduction in their total itemized deductions.
As with most other provisions in the 2001 tax law, this change ends after December 31, 2010, and itemized deductions and personal exemptions will again be limited for high-incomers in 2011.
* RMDs. For 2010, annual minimum distributions from most retirement plans are once again required for those aged 70½ and older. In 2009, these required minimum distributions (RMDs) were suspended.
2010 distributions must be taken by December 31, 2010. Taxpayers who turn 70½ in 2010 may choose to delay taking their first distribution until April 1, 2011.
* Roth conversions. Prior to this year, taxpayers with adjusted gross income over $100,000 were not allowed to convert a traditional IRA to a Roth IRA. A provision from a 2006 law went into effect January 1, 2010, repealing the income limit for Roth conversions.
Roth IRAs have two major benefits over the traditional IRA. Qualifying distributions are tax-free, and no annual distributions are required once you reach age 70½.
The major drawback to converting a traditional IRA to a Roth IRA is the fact that the conversion is taxable. But if you convert in 2010, you can elect to report half of the income on your 2011 tax return and half on your 2012 tax return.