Year-end Tax Planning Tips

The year is nearing its end — and before the year finally comes to a close, it is important to formulate some tax planning strategies which can give us a favorable position for next year, and the years to come. There are certain tax planning opportunities which individuals must be aware of, which were offered by both the Health Care Act and Tax Relief Act which were enacted into law in 2010.

In general, most investment advice that we can hear from the experts would recommend one of the five most common tax planning strategies which are believed to give us a better way to get started in the new year.

Medical Expense Flexible Spending Account (FSA)

The FSA allows us to use before-tax earnings from our investments to pay for our medical or health care expenses that are not covered by our medical insurance. It is essential to maximize our FSA before the year ends. According to medical savings accounts rules, for a 25% tax rate, this will allow an individual to avoid $25 in tax for every $100 that he allocates to his health care FSA. However, the Health Care Act limits the maximum contribution FSA to $2,500 — such act will commence in 2013. Thus, 2012 is the last year for us to use our FSA and maximize such benefits to pay some major or large medical expenses on a tax favored basis.

Traditional Retirement Assets to Roth IRA

Individuals may also consider converting their retirement assets into a Roth IRA — this is a best idea due to the elimination of income limits on conversion. There is also a one time opportunity to pay the conversion tax liability in 2011 and 2012. It is best to be familiar with the Roth IRA rules if you are considering to convert your traditional retirement assets to a Roth IRA.

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Converting to a Roth IRA is considered as powerful planning strategy as the Roth retirement assets provide tax-free assets that can create a better diversification of one’s investment portfolio. Switching IRA companies to those who are offering lesser or even no fee IRAs is also a wise idea.

Make Contributions to an IRA

An IRA is the best option for employed individuals to secure their funds for their future, and this is also a good way to earn an income replacement after retirement through the returns from our investment. It is wise to choose the best IRA company in order to maximize our profitability.

IRA Distributions as Charitable Contributions

There is a Tax Relief Act which is extended for 2011 which permits individuals aging 70 1/2 or older to use up to $100,000 per year of IRA distributions to make charitable contributions and avoid paying income tax on such amount. Also, the individual would have to include the IRA amount in income and then take a charitable deduction. Thus, those who are 70 and 1/2 years of age or older who are planning to make charitable contribution, using their IRA distribution funds will allow them to maximize the tax benefit on such donation.

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