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Federal Employees News Digest : Dec. 10, 2012
December 10, 2012 Vol. 62, No. 22 8 Visit us on the Internet at www.FederalDaily.com In most years, year-end tax planning can be a challenging task for employees. But the end of 2012 could be even more challenging as a result of the expiration of the George W. Bush-era tax cuts that have existed since 2001. Congress must act by Dec. 31, 2012, or else the current tax rates will revert to the higher rates that were in effect as of Dec. 31, 2000. The federal estate tax exemption also will be lowered from the current $5.12 million to $1 million. Additionally, several tax credits and deductions will be no longer available unless Congress acts. Many of the tax proposals currently being debated in Congress should not increase tax rates for married couples with adjusted gross incomes (AGI) of less than $250,000 and for individuals with AGIs of less than $200,000. The current tax rates should remain the same---at least through 2013---for those married couples and individuals. With that in mind, federal employees should consider several tax-reducing strategies that will hold up no matter what Congress decides tax rates will be during 2013 and what law changes take effect starting Jan. 1, 2013. The following is a list of recommended end-of-year tax-saving strategies: Maximize traditional Thrift Savings Plan (TSP) contribu- tions. During 2012, all employees can contribute a maximum $17,000 to the TSP. Employees age 50 and older can contribute an additional $5,500 for a total of $22,500. Contributions to the traditional TSP are deducted from an employee's gross salary, thus lowering the amount of an employee's salary subject to federal and state income taxes. The deadline for contributing to the TSP for 2012 is an employee's last pay date in December. Make charitable deductions and other deductible expenses during December. Those employees who itemize on their fed- eral income taxes---file Schedule A---should accumulate as many itemized deductions as possible before Jan. 1, 2013. For example, they should make charitable contributions in cash or check or donate goods to charitable organizations, pay their January 2013 mortgage in December, and make their fourth installment of their 2012 state estimated tax payment---normally due Jan. 15, 2013---in December. If they have a sufficient amount of out-of- pocket medical, dental and vision expenses exceeding 7.5 percent of AGI, they should schedule the timing of planned elective sur- gery, dental work or other medical procedures during December. Other medical-oriented expenses that could boost an individual above the 7.5 percent of AGI threshold are transportation costs to a medical facility, and certain medically related home improvements. Take advantage of the high estate- and gift-tax exemption. Assuming there is no action by Congress, the estate tax and lifetime gift tax exemption---cur- rently $5.12 million---will decrease to $1 million. The maximum estate tax rate will increase from 35 percent to 55 percent, effective Jan. 1, 2013. Those individuals who own more than $1 million in assets are encour- aged to review their estate plan before year-end and perhaps talk to an estate-planning lawyer about set- ting up trusts or other vehicles that will be able to use the current exemptions to transfer wealth to children or grandchildren. For example, individuals can give as much as $13,000 to as many individuals as they like, gift-tax free. Married individuals can gift $26,000 per recipient without being subject to the federal gift tax. One's assets include real estate, personal items, retirement and non- retirement accounts and life insurance. Get ready for a new Medicare surtax. A major tax change taking effect Jan. 1, 2013, is the 3.8 percent surtax on net invest- ment income for married individuals with a modified adjusted gross income (MAGI) of more than $250,000 and for single individuals with a MAGI of more than $200,000. As part of the Affordable Care Act of 2010, the tax will be applied to the smaller of net investment income or the amount by which taxable income exceeds the $250,000/$200,000MAGI thresholds. Net investment income includes dividends, interest, capital gains, annuities, royal- ties and rental income. Individuals who may be affected by the surtax should gift away income-producing assets such as stocks to children or grandchildren whose income is far below the MAGI thresholds. Accelerate plans to convert a traditional IRA to a Roth IRA. For those individuals who expect that their marginal tax brackets will increase in the future, converting a traditional IRA to a Roth IRA makes sense. Some of these reasons are: (1) Any withdrawn traditional IRA pretax contributions and earnings are taxed at current tax rates, which may be lower than tax rates in future years. (2) Converting in 2012 will result in lower future income. Qualified Roth IRA distributions are tax-free and lower income in future years could possibly help an individual avoid the Medicare surtax on future investment income. (3) Future qualified Roth IRA distributions will not be included in the employee's AGI, pos- sibly resulting in paying less for Medicare Part B premiums, which depend on an individual's AGI. Edward A. Zurndorfer is a Certified Financial Planner and Enrolled Agent in Silver Spring, MD. He is also a registered representative with FSC Securities Corporation, branch address: 833 Bromley St. - Suite A, Silver Spring, MD 20902. Phone: (301) 681-1652. Securities offered through FSC Securities Corporation,member FINRA/SIPC. EZ Accounting and Financial Services and FSC are independent companies. Informed Investor Some year-end tax-savings tips
Dec. 3, 2012
Dec. 17, 2012