As you industriously deck the halls and prepare to ring in 2012, evaluating your financial strategy may have escaped your holiday to-do list. Luckily, here at Campion, your financial strategy is always on our mind. The following list delves into a few of our favorite tax planning suggestions to help you successfully strategize for 2012 and years to come.
1. Consider a Roth IRA conversion. A Roth IRA conversion allows you to enjoy tax-free income from your retirement assets. Additionally, it can serve as an estate planning tool because your heir’s withdrawals would not be not subject to income tax. Roth conversion has not always been an option for high-income individuals. With tax revenue at the forefront of every Congressional debate, this opportunity for high-income individuals is most likely fleeting.
2. Give year-end gifts to children and grandchildren. If you have not already maxed out your potential tax-free gift for 2011, you should do so before 2012. In 2011, you can give each of your children and grandchildren $13,000 as a tax-free gift. Additionally, it is important to note, that tax law exempts gifts that are made for educational or medical expenses. Such expenditures must meet certain requirements and must be paid directly to the educational or medical institution. However, this presents yet another opportunity for tax-free asset transition.
3. Make an extra mortgage payment. Making an extra mortgage payment at the end of every year can reap a two-fold benefit. First, you can increase your home mortgage interest deduction by making your January 2012 payment before December 31st. By doing so, you are allowed to use your January interest deduction for 2011. Second, if you make an extra payment towards your principle, you shorten the life of your loan. These payments will come off the back end of the loan and therefore, will not change your monthly payment. However, by paying off your principal early, you will decrease your total mortgage expenditure over the life of the loan.
4. Record your charitable donations. As the holiday season inspires your inner-philanthropist, be sure to keep ample records. The tax benefits for charitable contributions are only available if you itemize your deductions. Keep in mind, for any gift of $250 or more, you must have a written acknowledgement from the charity. Additionally, if you are donating property valued at more than $5,000 you must obtain a qualified written appraisal.
5. Contemplate delaying your RMD. If you turned 70 ½ in 2011, you have the opportunity to strategically delay your first RMD to 2012. By doing so, you would be able to withdraw both your 2011 and 2012 RMDs next year. This would be beneficial if you’re expecting to be in a lower tax bracket in in 2012.
