The election is over–now what? Here’s some tips by By Katherine Fredette as posted on Seacoast Online for getting your own financial house in order by year end.
Tip 1: Participating in an employer’s retirement plan, or contributing to your own IRA, reduces taxable income, which reduces taxes due, but the money remains yours and continues to earn tax-deferred until you take it for income later on. Many low-wage folks who qualify for the retirement savers credit don’t realize that up to 50 percent of their contribution can be returned to them as a tax credit. Some participate in a retirement plan but fail to get the credit because they fill out the 1040-EZ form. If you fall into this category, contact your local VITA/TCE site to have an amended return prepared for free.
Tip 2: Also in my capacity as VITA tax site coordinator, I see folks come in with what they fear is incomplete paperwork, at wits’ end, stressed almost to tears, having lost their tax preparer or financial wiz in the household to a death or debilitating illness. Communication is key to avoiding such stress. As the survivor, you feel lost enough. We encourage the one in the household with the greater financial knowledge to tell their partner, spouse, son, daughter, etc., what you have for financial resources; where the information is stored; and who to contact for advice. To get you started, request a copy of “Your Valuable Papers” from the University of New Hampshire Cooperative Extension by calling their Education Center and Info Line at (877) 398-4769 or visit www.extension.unh.edu and click on Publications under Managing Money. If you are the partner, spouse, son or daughter, etc., who could benefit from this information, take time to listen and take notes. Better still, go to appointments together.
Tip 3: This is a great time of year to organize your records and statements and save your year-end copy. Bank, investment, and credit card statements, along with your last W-2 for the year, contain most of the information needed to prepare your 2012 return. If you have significant medical or dental expenses, request a summary of what you paid out of pocket from your health-care provider or pharmacy. These statements also contain the information you need to create or update your financial plan. Use them to write down your current spending and savings versus income and update your net worth. Estimate sources of income especially from interest, dividends and capital gains. These dollar amounts, including tax-free interest or dividends, affect whether and to what degree Social Security is taxable. Generally, up to 50 percent of your benefits will be taxable if half of your benefit plus all other income is more than $25,000 ($32,000 married filing jointly). However, under certain circumstances up to 85 percent of your benefits can be taxable — see the IRS Publication 915 on www.irs.gov or contact your source for tax preparation. The VITA/TCE free tax preparation sites can also answer this question for you.
TIP 4: Your income also determines the rate you pay for Medicare. If you have higher income, the law requires an adjustment to your monthly Medicare Part B (medical insurance) and Medicare prescription drug coverage premiums. To determine if you will pay higher premiums, Social Security uses the most recent federal tax return. If the total of your adjusted gross income and tax-exempt interest income (aka MAGI) over $85,000 for individuals (or over $170,000 for anyone filing married jointly), you will pay a higher premium for your Plan B and Medicare prescription drug coverage. For more information, view the fact sheet “Medicare Premiums: Rules for Higher-Income Beneficiaries” online at www.socialsecurity.gov/pubs/10536.pdf .
Tip 5: MAGI can be unusually high in years where you take money out of traditional IRAs or tax-deferred annuities. To take or not take money out of traditional IRAs. If you’re over 70½, you are required to take a minimum amount by Dec. 31, or be subject to tax penalties. This is called the RMD and your custodian typically sends you a form stating the amount needed to be withdrawn by year-end. The amount withdrawn gets added to your taxable income. Most folks delay taking more than the RMD to delay paying taxes. Ultimately; however, all of this money will be taxed. With potentially higher tax rates, couples especially may want to review this strategy. Another reason is because couples filing married jointly can receive more taxable income at a lower tax rate than single filers. In 2011, a single filer was in the 25 percent federal income tax bracket when earning more than $34,500 while a couple filing jointly could report up to $69,000 before being in the 25 percent tax bracket. Consider the advantages to taking taxable income now rather than waiting.
Tip 6: What if you don’t need the money now? Consider converting traditional IRA money to a Roth IRA. You can withdraw all or part of the assets from a traditional IRA and reinvest them (within 60 days) in a Roth IRA. For folks under 59½, if properly (and timely) rolled over, the 10 percent additional tax on early withdrawals will not apply. Though you pay taxes now, future earnings, if distributed according to the Roth IRA rules, are not taxable and there are no requirements to withdraw money from Roth IRAs. Conversions are taxable but not considered a distribution for the RMD. For this reason, if you are over 70½, be sure to make the adequate required minimum distribution (RMD) from your traditional IRA before Dec. 31, 2012.
While the Congress and president struggle with how best to respond to the national budget crisis, as individuals we can be proactive about our own needs and concerns by being informed about our options; investigating the impact of these changes on our personal finances; and, communicating with our family members about our situation. In case we fall off the cliff €» let’s put some safety nets in place for ourselves. If unsure, seek advice from tax and financial planning professionals before making a change. Internet, publications such as this one, and libraries provide access to numerous resources. The Asset Development Program at Rockingham Community Action helps low and moderate income households retain more of their income and develop assets to make self-sufficiency a reality. RCA as lead entity for the CA$H Coalition of Southeastern NH manages a Volunteer Income Tax Assistance (VITA) site where eligible taxpayers with income under $58,000 qualify for free tax preparation. The program also offers money management education and a 3:1 Matched Savings Program (aka IDAs). The CA$H Coalition serves Strafford and Rockingham Counties and is open year-round. More information can be obtained by calling Rockingham Community Action at (800) 556-9300 and mentioning “taxes” or visit www.rcaction.org.
