Written by Harold Goedde | Posted in TaxConnections
Edited and Posted by: Harold Goedde CPA, CMA, Ph.D.
By Jia Lynn Yang, Published: December 26, 2012
The expiring Bush tax cuts aren’t the only laws worth watching for investors as the year ends. A number of new rules are kicking in next year that will allow workers to stash away more money in their 401(k)s and individual retirement accounts.
To keep up with inflation, the Internal Revenue Service announced this year that the annual limit on contributions to 401(k) plans is rising to $17,500 from $17,000. Annual contributions to IRAs, both traditional and Roth, are rising to $5,500 from $5,000, the first time since 2008 that the limit has gone up.
With many Americans worried about potential tax increases coming next year if the “fiscal cliff” remains unresolved, the extra boost in potential savings could be coming at a good time, said Garth Scrivner, a Certified Financial Planner with Stan Corp Investment Advisers in Albuquerque, NM.
“It’s kind of nice with the potential increases in taxes next year to have the ability to defer a bit more money,” Scrivner said. “We’re encouraging people at the end of the year to take an inventory of tax changes that are happening next year and, to the extent that they can, maximize their 401(k) contributions.”
For those over 50, the additional “catch-up” amount allowed will remain the same at $5,500, meaning the overall limit for such workers will be rising to $23,000 from $22,500.
In addition to raising the contribution limits, the IRS has also expanded how many people are eligible to contribute to Roth IRAs. For married couples filing joint, the upper income limit will rise to $188,000 from $183,000. For single and head of household, the limit will increase to $127,000 from $125,000. (All amounts are adjusted gross income.)
The higher contribution limits toward retirement plans come as many Americans look for ways to increase their returns after seeing their investment portfolios battered in recent years.
Starting January 1, 2013, monthly Social Security benefits will rise 1.7 percent to keep up with inflation. The Medicare premium deducted from your Social Security will also increase on January 1.
There are two other tweaks to look for: (1) The IRS is raising the limit on tax-free gifts to $14,000 from $13,000. (2) Americans living abroad will be able to exclude up to $97,600 in foreign earned income starting in 2013, a modest increase from the current $95,100.
Investors have enjoyed a pretty strong year in 2012, with the Standard & Poor’s 500-stock index rising about 13 percent. Despite concerns about the fiscal cliff, some analysts see signs that next year could include even more stock gains, driven by an improving housing and auto market as well as rising consumer confidence. The drawback is that ,if a compromise is not reached on the “fiscal cliff” by the end of the year, the tax rate on long-term capital gains and dividends will significantly increase in 2013.
Many workers saving for retirement still have a lot of ground to make up. More than half of working households run the risk of being unable to maintain their standard of living when they retire, according to a report released in October by the Center for Retirement Research at Boston College. The report, based on the Federal Reserve’s 2010 survey on consumer finances, was the first look by the center at how workers have fared since the financial crisis. It showed that the number of households at risk had risen to 53 percent in 2010 from 44 percent in 2007.
CIRCULAR 230 DISCLOSURE: Pursuant to regulations governing practice before the IRS, any tax advice contained herein is not intended or written to be used and cannot be used by the taxpayer for the purpose of avoiding tax penalties that may be imposed on the taxpayer.
Harold Goedde
Dr. Goedde is a former college professor who taught income tax, auditing, personal finance, and financial accounting and has 25 years of experience preparing income tax returns and consulting. He published many accounting and tax articles in professional journals. He is presently retired and does tax return preparation and consulting. He also writes articles on various aspects of taxation. During tax season he works as a volunteer income tax return preparer for seniors and low income persons in the IRS’s VITA program.
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