Making Your Money Last


Tax-Savvy Moves Retirees Can Use to Trim 2012 Tab

The Tax-Friendliest States for Retirees

If there's one thing you can say about the spectacle in Washington over tax rates, it's this: It's business as usual when it comes to trimming your 2012 tax bill. When you sit down to prepare your return, keep in mind that federal tax rates and write-offs are pretty much unchanged from 2011.

See Also: 7 Ways to Protect Yourself Against Tax Scams

That means a good place to start your review is your 2011 return. For instance, if you paid alternative minimum tax in 2011, you'll probably pay it again if your financial situation hasn't changed. If you avoided the AMT in 2011, it's likely you'll escape it again.

But don't put your tax prep on autopilot. If your income dropped last year and you incurred big health care bills, you may qualify for a deduction of medical expenses above 7.5% of your adjusted gross income.

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Also, if you're a lifelong itemizer, perhaps it's time to consider taking the standard deduction instead—especially if you're newly retired and your income has taken a hit (and thus your state income tax write-off has fallen). And if you were 65 or older at the end of last year, your standard deduction will be higher. The basic 2012 standard deduction of $11,900 on a joint return rises by $1,150 for each spouse who's 65 or older. On single returns, the basic $5,950 becomes a $7,400 standard deduction for taxpayers 65 and older.

If you do itemize, you can choose between deducting state and local sales tax or state and local income tax. In its New Year's Day tax package, Congress retroactively restored the sales tax option, which had expired at the end of 2011—a real benefit for taxpayers who live in states without an income tax.

Taxpayers who deduct state income tax must remember to look at all state income tax withheld from paychecks or shelled out in quarterly estimated payments, says Bob Scharin, senior tax analyst for Thomson Reuters, a publisher of business information. And he offers this reminder: If you paid extra state tax when you filed your 2011 state return last spring, remember to include that in your 2012 federal deduction.

Supercharge your savings. You have until April 15 to max out on your 2012 contributions to your IRA. You can sock away up to $5,000, plus a $1,000 catch-up contribution if you were 50 or older by the end of last year. If your spouse has little or no earnings and you file a joint return, you can contribute to a spousal IRA for your husband or wife as long as your salary can cover the deposits. If you're self-employed, you have until you file your return—as late as October 15 if you file for an extension—to set up and contribute to a SEP IRA. The maximum contribution is $50,000.

Moderate-income workers may be eligible for the retirement saver's credit, which could offset up to $1,000 ($2,000 for joint filers) of contributions to an IRA or workplace retirement plan. The credit phases out above AGI of $28,750 for individuals and above $57,500 for joint filers. If you retired in 2012, perhaps your AGI has fallen enough to open the door to this credit. Check out IRS Form 8880.

Watch for new cost basis reporting. Take a close look at Form 1099-B from your mutual fund company or brokerage firm. New rules in effect in 2012 require that when you sell shares of mutual funds and exchange-traded funds, the company must report to you—and the IRS—exactly what you paid for them (the cost basis) and whether any gain or loss is long- or short-term. For mutual funds, the rule is limited to shares bought in 2012 or later; it applies to stocks purchased starting in 2011. (Cost basis reporting will extend to bonds, options and other investments purchased beginning in 2014.)

Anyone who dealt with the reporting rules for stocks last year knows how confusing they can be. Most investors will have shares covered by the new rules (such as stocks bought and sold since the beginning of 2011) and uncovered shares, for stocks and funds bought before the new rules took effect. You will need to fill out separate Form 8949s for the sale of covered and uncovered shares and carry the results to your Schedule D for reporting gains and losses.

You'll have to search your records to find the basis of uncovered shares. But take a close look at the basis reported by your broker on covered shares. Unless you specifically identified the shares you wanted to sell, the broker will likely report the basis of the first shares you bought. If you bought in multiple transactions and sold only part of your shares, the oldest shares could have the lowest basis and the biggest taxable gain.

Check on IRA-to-charity rollover. On January 1, Congress made retroactive the tax break that allows people 70 1/2 and older to make tax-free transfers of up to $100,000 from their IRAs to charity. The transfer counts toward your required minimum distribution.

Unfortunately, action came too late for most seniors, who were required to take distributions by
December 31. But people who transferred money directly from their IRAs to charity in 2012 hoping that the law would be passed retroactively are in luck.

Edmund Reif, 79, was one of them. Taking advice from Kiplinger's Retirement Report, the retired engineer from Painted Post, N.Y., says he asked his IRA custodian to transfer funds directly to the United Way, American Red Cross and three other charities. The transfer satisfied his RMD. Because the transferred funds are excluded from his adjusted gross income, Reif says, "I'm able to decrease the taxable portion of my Social Security benefits."

Lawmakers passed some special rules for taking advantage of the break for 2012. People who took their RMDs in December 2012 had until January 31 to give that cash to a charity and have it count as a tax-free transfer for 2012.

Deduct disaster losses. People who suffered property damage from Hurricane Sandy or other severe weather may qualify for a deduction to offset losses for property such as a principal residence. "You can't take a deduction for any losses reimbursed by insurance, but only for out-of-pocket costs," says Bob Meighan, vice-president of consumer advocacy for Intuit's TurboTax.

Before reporting a personal loss, you must reduce the amount of the loss by $100. Then, deduct only the balance that exceeds 10% of your adjusted gross income. For example, if you have $20,000 in unreimbursed casualty losses from Hurricane Sandy and your AGI is $100,000, you would first subtract $100. From the $19,900 balance, you would then subtract $10,000. The remaining $9,900 is the amount you can deduct on Schedule A of your tax return. Use IRS Form 4684 to report casualty losses, and then carry the amount to Schedule A. Consult IRS Publication 547, Casualties, Disasters, and Thefts.

Haven't yet filed for Social Security? Create a personalized strategy to maximize your lifetime income from Social Security. Order Kiplinger's Social Security Solutions today.

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