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The Telegram
  • Making Cents: Look over your deductions before it’s too late

  • As the fourth quarter rolls around, it may be your last chance to proactively improve your tax, and maybe even your overall financial situation in 2012.

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  • As the fourth quarter rolls around, it may be your last chance to proactively improve your tax, and maybe even your overall financial situation in 2012.
    Whether we see the extension of the Bush-era tax cuts or not still remains to be seen, but the first consideration may be to see how you are doing so far this year with 401(k) withholdings. It’s not too late to adjust your deposit amount to take advantage of the maximum amount allowable.
    Also on the 401(k), if you find yourself in a low tax bracket this year yet still making traditional 401(k) contributions, consider switching these contributions to Roth 401(k) contributions. For the Roth 401(k) contribution you’ll receive no current deduction, but both the earnings and future withdrawals remain tax free under current law.
    Consider a Roth conversion. This is a painful pill to swallow because you’d owe taxes for this year on the entire amount of the conversion. It can, however create lasting tax benefits if you don’t think you’ll need the money soon. If you don’t think you’ll ever spend this money, and have a desire to get it to the next generation or two, the Roth has tremendous legacy power due to the extended years of tax deferral.
    If you are over age 71, make sure that you’ve taken your required minimum distribution from all qualified plans like 401(k), IRA, SEP. The penalty for missing the distribution or taking too little is 50 percent of the under-withdrawal. Also, if you have any room left in the lower tax brackets, consider upping your withdrawal beyond the minimum amount. This could be helpful if taxes rise throughout your lifetime of distributions.
    Take a look at your charitable plans now. Too many people wait until December, and then it is simply too late to do anything creative such as gifting appreciated assets. If the gifted asset were a security or fund for that matter, you’d get a deduction for the full amount of the fair market value of that security on the date of the gift, even if your tax cost basis is zero. Maybe you’ve got some closets to clean out or some furniture to donate. Do it now and the deduction will find its way to your 2012 tax return if you itemize your deductions.
    After you decide which course of action to pursue, prepare a forecast of your 2012 tax return and see if you’ve paid enough in estimates or have had enough tax withheld. Don’t forget your state taxes here, while the federal tax is often the larger of the two, don’t ignore your state tax obligations. Their penalties can be costly too.
    Take a look through your portfolio as well. Are there opportunities to cash in losses to take advantage of the $3,000 maximum deduction against ordinary income? Conversely, this may be a good time to re-balance your holdings to take advantage of the current low capital gains tax rates.
    Page 2 of 2 - Avoid last minute surprises, have a close look now before it is too late to make a difference for this year.
    John P. Napolitano is CEO of U.S. Wealth Management in Braintree, Mass., and 2012 president of the Financial Planning Association of Massachusetts. He may be reached at jnap@uswealthcompanies.com or on Facebook as JohnPNapolitano.
     
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