10 Ways to Save Money for the Expensive 2013 Tax Increases Coming Your Way

Posted in Savings Account , Tax • December 3, 2012

2013 tax increasesDespite a nascent economic recovery, the last-minute federal budget agreement struck in the summer of 2011 will present a fresh batch of financial challenges come this January, including a collection of agreed-upon measures designed to boost revenue for the cash-strapped federal government. These were an unfortunate but necessary component of the infamous deal to raise the country’s debt ceiling last year. As a result, American lawmakers find themselves facing yet another preventable economic crisis.

The most controversial piece of the revenue-boosting agreement is an across-the-board 2013 tax increase that raises rates for most American workers. In fact, only the country’s lowest-earning taxpayers are exempted from the hikes.

While it’s possible that Congress may yet reach a deal to prevent this “fiscal cliff” scenario from unfolding, the two main parties seem unwilling to compromise on certain tax-related issues before the calendar flips to 2013. Assuming that these hikes do occur, you’ll need to take some steps to minimize your potential losses. Use these 10 ways to save money to start planning for the fiscal cliff.

1. Maximize Your IRA Contributions in 2013

If you haven’t done so already, wait until the first weeks of 2013 to open a traditional IRA. As soon as you can, max out your contributions to the account. Since these contributions are tax-free, they won’t be subject to higher tax rates like the rest of your income.

2. Roll Over Your Existing IRA Now

If you already have a traditional IRA, convert it into a Roth IRA that boasts tax-free retirement distributions. In order to realize any tax savings from this move, you’ll need to do it before the end of 2012. All of the assets in the converted IRA will be taxed as income at the lower 2012 rates instead of the higher 2013 rates.

3. Take Advantage of a Weak Market

If Congress and President Obama fail to reach a temporary budget agreement before lawmakers leave Washington for the holidays, the stock market will probably tank. When this happens, don’t panic. Instead, use it as an opportunity to load up on cheap stocks. Once Congress reaches a deal in early 2013, the market will recover and you’ll feel like a genius.

4. Postpone Charitable Donations Until 2013

Assuming Congress doesn’t ax the venerable ”charitable contributions” income tax deduction, any gifts that you make to charity in 2013 may limit the effects of higher taxes. If your taxes go up by 5 percent in 2013, you’ll get to keep an extra 5 percent of the income that you offset with this deduction.

5. Take Profits in 2012

There’s no shame in taking profits when it’s convenient to do so. Tax rates on capital gains and dividend income stand to increase in 2013. In fact, dividend rates will nearly triple for some taxpayers. Avoid this by selling liquid investments before 2012 ends. You can buy them back when Congress comes to its senses in 2013.

6. Start a Medical Emergency Fund

Any deal to reverse the impending tax hikes may adversely impact benefits for millions of Medicare subscribers. If you’re young or middle-aged and worry about Medicare’s solvency, set aside a dedicated health savings account for your long-term medical needs. If Medicare doesn’t exist or isn’t solvent when you retire, this can be your backup plan.

7. Start a College Savings Fund

In normal times, college savings plans are a great way to shield some of your income and savings from the IRS. These days, they’re absolutely essential. Even if your kids are still in diapers, investigate your state’s 529 plans and consider enrolling in one.

8. Hold on to Your House

Don’t use the upcoming tax hikes as an excuse to panic and head for the hills. If you own your own home, continue making your mortgage payments. After all, the mortgage interest tax deduction may be the single largest tax deduction to which you’re entitled. You’ll keep your tax burden lower than it would normally be by continuing to claim every penny of mortgage interest that you pay.

9. Move Somewhere Solvent

If you’re unhappy about the coming tax hikes, vote with your feet and move across state lines. While you won’t be able to avoid paying a higher federal income tax rate unless you flee the country, you can move to a place with lower state tax rates. For instance, New Hampshire has no state sales tax or income tax.

10. Buy Tax-Free Municipal Bonds

You don’t have to stash away the proceeds from your pre-2013 stock sales in a low-interest savings account. Instead, buy high-yield municipal bonds that aren’t subject to state or federal taxation. Be sure to research the cities in which you plan to invest before actually buying any bonds.

This article was written by Chad Fisher on behalf of Any House Wanted, they want to sell your house in a week.

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