For the most part, if you want to count a tax deduction for a particular tax year, you need to spend the money in that year. However, even though it is now 2013, there are still some opportunities to reduce your 2012 income. Consider your situation. If a couple thousand extra dollars in a tax deduction can keep you out of the next tax bracket up, or keep you from hitting an income threshold that results in a phase out for some other tax benefit, it can make sense to take another deduction.
Here are some of the deductions you can take for 2012, even though we’ve started 2013.
If you haven’t maxed out your IRA contributions for 2012, you can still contribute, and receive a tax deduction. You can contribute to a Traditional IRA for a tax deduction up until April 15 of the following year. (Remember that there is no tax deduction when you contribute to a Roth IRA.)
When you deduct your contribution from a previous year, you need to make sure that you are clear about the nature of the contribution. Often, when you contribute money, you can designate whether it is a current year contribution or a previous year contribution. If you want your deduction to count for last year, you need to double-check to make sure you are making a previous year contribution before you finalize the transaction.
Realize, too, that you can’t claim one contribution for two years. So, if you decide to make a 2012 contribution to your Traditional IRA before April 15, 2013, you won’t be able to claim the deduction on your 2013 taxes. Your deduction can only be claimed once.
Another tax-advantaged account that allows you to make previous year contributions up to April 15 of the following year is the Health Savings Account (HSA). There are contribution limits, so check to see where you stand. If you still have room to make a contribution, you can do so.
As with the IRA contribution, you need to make sure that you specify that your contribution is a previous year contribution, and you can only take the deduction for one tax year. Because the contribution limits are higher for a HSA than for an IRA, you might be able to use this type of account if you have run out of room to contribute to your IRA.
Part of the tax portion of the fiscal cliff deal includes an extension of the Qualified Charitable Distribution from an IRA. This means that if you are taking a distribution to donate to charity, it’s tax-free, and you can claim a deduction against your income. In order to take advantage of this tax break for 2012, you need to take your distribution and make the charitable contribution by February 1, 2013.
Remember that a tax deduction isn’t quite as valuable as a tax credit. When you receive a deduction, you are reducing your taxable income. This can reduce your taxes overall, but it is not the same as the dollar for dollar reduction in what you owe that comes with a tax credit.
Think about whether or not making the extra contribution is worth it. What will be accomplished with your lower income? In some cases, a slightly lower income doesn’t make much of a difference. Reducing your taxable income by $2,000 or $3,000 might only reduce your tax bill by a very small amount.
Where it makes sense is if you are on a borderline somewhere. Could the deduction keep you out of a higher tax bracket? Another consideration is the income threshold attached to some tax benefits. Some deductions and credits have phase outs based on your AGI. There are some deductions that you can only take if your costs exceed a certain percentage of your AGI. If you are just over the threshold, another deduction might help you bring your income down to the point where you can remain eligible for tax benefits that can really impact your bottom line.
If you have an accountant to do your taxes, you can have him or her run different scenarios to see the effects on your tax liability, and help you find the best solution.
Photo by David Reber.
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