3 last-minute moves to lower your tax bill Commentary: There’s still time to take advantage of these tax breaks

Bill Bischoff for the Wall St. Journal writes: 2012 is in your rear-view mirror, it’s not too late to make some moves that will save taxes on Form 1040 and maybe on your state income tax return as well. Here are three possibilities.

1. Choose to deduct sales taxes if you made major purchases

If you live in a state with low or no personal income tax, be aware Congress restored the federal income tax deduction for general state and local sales taxes to cover taxes paid in 2012. Therefore, you have the option of deducting either state and local sales taxes or state and local income taxes on your 2012 return — but not both. If you chose to deduct sales taxes, most of you will have to use an IRS-provided table to calculate your sales-tax deduction. However, if you’ve hoarded receipts from your 2012 purchases, you can add up the actual sales tax amounts and deduct the total if that gives you a better answer. Even if you’re forced to use the IRS table, you can still deduct actual sales taxes from major 2012 purchases for things like motor vehicles (including motorcycles, off-road vehicles, and RVs), boats, aircraft, and certain home improvements on top of the predetermined amount from the table. For details, see the instructions for Schedule A of Form 1040 at the IRS website: www.irs.gov.

2. Establish a SEP for a big tax break

If you’re self-employed and have not yet set up a tax-favored retirement plan for yourself, you can establish a simplified employee pension (SEP). Unlike other types of small business retirement plans, a SEP can be created this year and still generate a deduction on last year’s return. In fact, if you extend your 2012 return to October 15, you’ll have until that late date to take care of the paperwork and make a deductible contribution for last year. The deductible pay-in can be up to 20% of your 2012 self-employment income or up to 25% of your 2012 salary if you worked for your own corporation. The absolute maximum amount you can contribute for the 2012 tax year is $50,000. So we can be talking major bucks here, and major tax savings too.

To establish a SEP, go to your bank or brokerage firm and fill out Form 5305-SEP. It takes five minutes. Seriously. But don’t jump the gun. You may not want a SEP if you have employees, because you might have to cover them and make contributions to their accounts. That could be too expensive. Bottom line: if you have employees, don’t start up a SEP without consulting your tax pro.

Tax Savings Example: If you’re in the 28% federal bracket, a $30,000 SEP contribution could lower your 2012 tax bill by a cool $8,400 (plus any state income tax savings). In fact, the tax savings could finance a big chunk of your contribution.

3. Make a Deductible IRA Contribution

If you’ve not yet made a deductible traditional IRA contribution for the 2012 tax year, you can do so between now and the tax filing deadline of April 15 and claim the resulting write-off on your 2012 return. You can potentially make a deductible contribution of up to $5,000, or $6,000 if you were age 50 or older as of December 31, 2012. If you’re married, ditto for your spouse.

There’s a catch: you must have enough 2012 earned income (from jobs, self-employment, or alimony received) to equal or exceed your IRA contribution(s) for the 2012 tax year. If you’re married, either spouse can provide the necessary earned income. The other catch: deductible IRA contributions are phased out (reduced or eliminated) if last year’s income was too high, as explained later. The good news: the phase-out ranges are much higher than a few years ago.

Tax Savings Example: If you’re in the 25% federal bracket, making a $5,000 deductible IRA contribution between now and April 15 would save you $1,250 in 2012 taxes (plus any state income tax savings). If you and your spouse are both over 50, two $6,000 contributions (total of $12,000) would save $3,000 if you’re in the 25% bracket (plus any state income tax savings).

Ground Rules for Deductible IRAs

• You, and/or your spouse if you’re married, must have 2012 earned income at least equal to what you contribute for 2012.
• If you turned 70 1/2 last year, you can’t make any deductible contribution.
• If you’re unmarried and were covered by a retirement plan in 2012, your eligibility to make a deductible contribution for last year is phased out between adjusted gross income (AGI) of $58,000 and $68,000.
• If you’re married and both you and your spouse were covered by retirement plans in 2012, your eligibility to make a deductible contribution for last year is phased out between joint AGI of $92,000 and $112,000. Ditto for your spouse’s ability to make a deductible contribution.
• If you’re married and only one spouse was covered by a retirement plan, the covered spouse’s eligibility to make a deductible contribution for last year is phased out between joint AGI of $92,000 and $112,000. The non-covered spouse’s eligibility is phased out between AGI of $173,000 and $183,000.