Your Money

Don’t miss opportunities to reduce your tax bill

Certified financial plannerApril 6, 2013 

While there are fewer opportunities to reduce your tax bill after year-end, there are some.

In addition to the tax savings, a main benefit to the largest post year-end item is future retirement savings. While tax planning after the end of the year can help you reduce your tax liability, it can also make the tax-filing season cheaper and easier and give you a jump start on next year’s taxes, as well.

If you are not self-employed, the No. 1 tax savings opportunity after year-end is to fund an Individual Retirement Account (IRA). Without getting too in depth about the intricacies of IRAs, in general, if you have earned income from a job or self-employment and are under the age of 50, you can contribute up to $5,000 into an IRA for 2012. This contribution must be made by April 15, 2013 without extensions. If you are over the age of 50, you can contribute an additional $1,000 via the catch-up provision associated with IRAs. If you are a non-working spouse, you can utilize the earnings of the working spouse to allow a contribution to be made in your own IRA.

Whether the contribution is deductible, and thus saves you taxes, will depend upon your filing status, your adjusted gross income and whether you and/or your spouse are covered by a retirement plan at work. You cannot simply assume because you make a contribution to an IRA that it is deductible.

As a basic rule, if you file as a single taxpayer and are not a participant in a retirement plan at work, the contribution is deductible. If you are married and file jointly and neither of you are participants in a retirement plan, then any contribution is deductible. However, it becomes much more complicated if you and/or your spouse do participate in a plan at work. At that point, your adjusted gross income becomes a deciding factor in the deductibility of such contributions. See IRS Publication 590 for more details.

While a Roth IRA may be a great savings vehicle, you do not receive a deduction for any contributions to such.

If you are self-employed, an even larger contribution can be made using an SEP IRA. Unlike the Traditional IRA, SEP IRA contributions can be made up until the tax filing deadline, plus extensions. This is the only type of retirement account that can be set up after year-end for a self-employed person and thus is very popular with those who did not plan accordingly.

In general, to find your allowable contribution, multiply the net earnings from your business by 20 percent. If your self-employed earnings exceed $250,000, you will be limited to a maximum $50,000 SEP contribution.

This is an excellent tool for those who are self-employed without employees. If you have employees, the IRS requires a contribution for the employees at the same percentage made for the owner. There are qualification rules associated with this for employees, which can be found in IRS Publication 590.

Lastly, make sure you are organized. Many taxpayers simply overlook deductions because they can’t find them or don’t track them very well. A good system, whether manual or via a computer program such as Quicken or Mint.com, can make a world of difference between owing taxes and getting a refund.

While taxes may not be your favorite activity, taking simple steps can make them much easier and less expensive for you and save money even after year-end.

Life is a journey, plan for it.

Neil A. Brown is a CPA and CFP with Burkett Financial Services in West Columbia. Find him at www.uscneil.com or (803) 200-2272.

The State is pleased to provide this opportunity to share information, experiences and observations about what's in the news. Some of the comments may be reprinted elsewhere in the site or in the newspaper. We encourage lively, open debate on the issues of the day, and ask that you refrain from profanity, hate speech, personal comments and remarks that are off point. Thank you for taking the time to offer your thoughts.

Commenting FAQs | Terms of Service