Experts offer advice on end-of-year financial planning

December 28, 2012 9:51:08 AM

Sarah Fowler - [email protected]


With only days left before the end of the year and questions surrounding the looming fiscal cliff local financial experts are weighing in on ways to protect your investments and see the best return on 2012 income taxes.  


Michael Prince, a certified public accountant with T.E. Lott and Company, said the impending fiscal cliff could create chaos for taxpayers. 


"Reducing income and increasing deductions is the normal plan when a taxpayer's income and the tax rates are steady year to year," he said. "Unless Congress makes changes, the average tax rates will increase in 2013. In 2012, the lowest tax rate is 10 percent while in 2013 the lowest tax rate will be 15 percent. Dividends will be taxed at ordinary rates, possibly as high as 39.6 percent in 2013, while in 2012 dividends and capital gains are taxed at a maximum rate of 15 percent." 


"Contrary to the normal strategy, and depending on the taxpayer's situation, it may be an overall tax saving move to accelerate income into the 2012 year in order to have it taxed at lower rates, at the same time, deferring deductions until the 2013 year so that they reduce income that will be taxed at the higher tax rates. This will not necessarily reduce the current tax bill but may help save taxes in the future. 


"Deductions reduce your taxable income while tax credits actually reduce your tax liability dollar for dollar. Tax credits help to reduce the overall tax bill better than deductions."  


Prince said tax credits include child care and dependent credit for child-care expenses for working taxpayers, education credits for college tuition, fees and books, child tax credit for dependents under the age of 17 and foreign tax credits paid on dividends and interest earnings from foreign investments. 


"Tax credits are calculated using several factors so they could be limited based on taxpayer's particular situation," Prince said. 


While Prince works to save his clients money on the income taxes, financial advisor Scott Ferguson with Financial Concepts concentrates on helping his clients prepare for the long-term.  


"If you haven't done so yet, find time over the holidays to review your financial plan," Ferguson said.  


"If you do not currently have a financial plan, I strongly recommend you put one in place."  


Ferguson said that in addition to having a financial plan in place, knowing the limits of donations to your retirement plan is key.  


"In most cases you will have until April 15, 2013 to make contributions to your retirement plans for year 2012, but some plans require the contributions to be made by Dec. 31, 2012," he said. "Find out when the requirements are for your plan, make sure that you get your contributions in before the deadline. Individual Retirement Accounts (IRAs) contribution limits for 2012 are $5,000 for individuals under age 50. Those over age 50 can make an additional $1,000 catch-up contribution." 


Ferguson echoed Prince concerning increasing tax rates and added that the guideline for IRAs are changing in the coming year as well. 


"Keep in mind contribution limits are increasing for 2013," Ferguson said. "Individuals under age 50 can make contributions of $5,500. Those over age 50 will still be able to make the additional $1,000 catch-up contribution. If your plan is a 401(k) or a salary-deducted plan, and you've had a bonus, or extra income, use your last paycheck in 2012 to contribute extra to reduce taxes and keep more of that extra income." 


Taxpayers should also consider giving to charity to reduce their tax liability. Only charitable donations made by Dec. 31 will count against the 2012 tax burden. Also, those who wish to deduct charitable giving should be sure to note if contributions to the charity are tax-deductible.

Sarah Fowler covered crime, education and community related events for The Dispatch.