Important Changes to be Aware of in the New Year
January 04, 2012As a financial planner at Financial Finesse, one of my responsibilities is to make sure our content library is up to date when things change. Now that I’ve had a chance to review all of the changes that will take place in 2012, I thought it would be helpful to list what I consider some of the more relevant ones, and what you should do to take advantage of them.
Increased 401(k) contribution limits
Employees under the age of 50 may contribute up to $17,000 to a 401(k) in 2012 (up from $16,500 last year). The catch-up amount remains the same at $5,500.
Tip: If you can afford to max out your contributions, you should. It may not seem like much, but increasing your annual contribution by $500 could increase your 401(k) balance by over $20,000.1
Increased contribution limits to Health Savings Accounts
For those of you that participate in a high-deductible health insurance program, take note that contribution limits to health savings accounts (HSAs) have increased. For 2012, employees with single coverage may have up to $3,100 contributed to their HSA, while those who carry family coverage may have up to $6,250 contributed to the account. This amount includes employee and employer contributions.
Tip: If you haven’t maxed out your contribution for last year, you still have time! You have until April 17, 20122 to make a contribution for the 2011 tax year, up to a total of $3,050 if you have single coverage, and up to $6,150 if you carry family coverage.
Increased income limits for IRA eligibility
Taxpayers that do not anticipate a higher income in 2012 may become eligible for taking a tax deduction for contributions to a traditional IRA, or for making a contribution directly to a Roth IRA thanks to increases in the income limits. For married couples filing jointly, contributions to a traditional IRA are fully deductible if Modified Adjusted Gross Income (MAGI) is below $92,000 ($58,000 if filing single). Full contributions may be made directly to a Roth IRA for joint filers with income below $173,000 ($110,000 if single).
Tip: Anticipating a tax refund for 2011? If so, consider using it to fund a Roth IRA (if you qualify). You have up until April 17, 20122 to make contributions for the 2011 tax year, so if you file early enough and get your tax refund before the April 17th deadline, you can still make a Roth contribution for the 2011 tax year—and you don’t have to resubmit your tax return.
The Increased Applicable Exclusion Amount extends into 2012
Taxpayers with large estates (i.e. a net worth in excess of $1,000,000) may want to take advantage of the current applicable exclusion amount (AEA) that allows them to transfer up to $5,120,000 without incurring a gift or estate tax. The AEA is a lifetime exclusion that is scheduled to drop to $1,000,000 in 2013—barring any legislative changes—so if you, or someone you know, has more than they need to survive and would like to pass along assets without incurring unnecessary taxes, 2012 may be the year to do it.
Tip: Calculate your net worth (including life insurance) to see if you have a potential estate tax issue. For further help, contact a financial planner and/or an estate planning professional.
With 2012 being an election year, things could look a lot different in 2013. That being said, decide today what you can do to make 2012 a prosperous new year.
1Assumes making contributions for 20 years at a 7% compounded rate of return.
2The traditional tax return filing deadline is April 15 of each year, but April 15, 2012 is a Sunday and April 16, 2012 falls on Emancipation Day in the District of Columbia.