Get Yourself in Tip-Top Tax Shape

By David Chazin - In conjunction with Lincoln Financial Advisors Corp., a registered investment advisor

Time really does fly and, before you know it, the calendar will turn to 2013. As 2012 draws to a close, there are some things you should be doing… that is if you want to avoid paying taxes that are higher than necessary. What follows is a short checklist that will help you and your Chevron colleagues reduce your tax bills.

  • Increase contributions to the ESIP (or other) retirement plan. Taxes are based on your Adjusted Gross Income (AGI), but every cent that you contribute to your Chevron 401(k) plan, or your spouse’s retirement plan, lowers your AGI. In 2012, you can contribute up to $16,500 of pre-tax income if you’re less than 50 years old, and if you’re older, you can contribute an additional $5,500. If you aren’t “maxing out” the amount you’re contributing, try to change this for the rest of the year.
  • Contribute to an Individual Retirement Account (IRA), if you qualify. Traditional IRA’s have similar tax treatment (and therefore tax benefits) as your Chevron 401(k) and other employer-sponsored retirement plans. The difference is that you have more freedom to set up your IRA through other companies that give you access to more investment options.
  • Contribute to a Roth IRA, if you qualify. While Roth IRA contributions are not tax-deductible, the money in there grows tax-free and there are no taxes when you withdraw money from your account. Note that contributions to a traditional IRA reduce the amount you may contribute to a Roth IRA and there are AGI limitations, so double-check to make sure you’re eligible for a Roth.
  • Realize losses in non-retirement accounts. If you have any non-qualified accounts (i.e. money that’s not in retirement accounts), selling stocks at a loss can offset capital gains taxes. This strategy is called tax-loss harvesting, and there’s other factors you should consider before doing this, so it may be advisable for us to meet to discuss any year-end trades you should consider making.
  • Increase the amount you set aside for next year in the Chevron flexible spending account if you set aside too little for this year. The flex spending account allows you to spend pre-tax dollars on qualified health care and other expenses, which can save you some money.
  • Take advantage of the annual gift exclusion and expiring estate tax exemption. You can gift $13,000 in 2012 to an unlimited number of individuals free of gift tax. However, you cannot carry over unused exclusions from one year to the next. In addition to the annual gift exclusion, there is a $5.12 million lifetime estate tax exemption that is set to expire at the end of 2012. This is a once-in-a-lifetime opportunity for Chevron employees who have high net worth that would like to pass assets onto children or other heirs.
  • Increase your withholding on your paycheck. If you end up having to pay when you do your CA state and federal tax returns, you can change the withholding on your Chevron paycheck or your spouse’s paycheck. Doing so may reduce or eliminate the penalty.
  • Consider taking an eligible rollover distribution from a qualified retirement plan. If the increased withholding option is unavailable or will not sufficiently address the problem, you can withdraw money from any qualified account. Income tax will be withheld from the distribution and will be applied toward the taxes owed for 2012.  
  • If you’re over age 70 ½, take a required minimum distribution (RMD) from your IRA or 401(k) plan. This doesn’t pertain to many active Chevron employees, but Chevron retirees should take note. Failure to take a required withdrawal can result in a penalty of 50 percent of the required amount not withdrawn. If you turned 70 ½ in 2012, you can wait until 2013 and just take a double distribution then, but that may raise your tax bracket in 2013, when taxes may be even higher.
  • Make energy saving improvements to your primary residence. There are substantial tax credits for energy efficient home improvements such as solar water heaters that can save you a lot of money. These tax breaks stay on the books through 2016.
  • If you have minor children, contribute to a qualified college savings plan. One popular option is a Section 529 plan. There are no AGI limits on contributions to 529 plans; however, distributions of earnings from a 529 plan are tax-free only if used to pay for higher education expenses (college and above). Another option is a Coverdell Educated Savings Account (CESA).  Distributions of earnings from a CESA can be used tax-free for higher education, or elementary or secondary school, but it’s subject to AGI limits.
  • Estimate the effect of any year-end planning moves on the alternative minimum tax (AMT). When doing this, keep in mind that many tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes. These include the deduction for state property taxes on your residence, state income taxes (or state sales tax if you elect this deduction option), miscellaneous itemized deductions, and personal exemption deductions.  Other deductions, such as for medical expenses, are calculated in a more restrictive way for AMT purposes than for regular tax purposes. As a result, in some cases, deductions should be deferred rather than accelerated to keep them from being lost because of the AMT.

We’d be happy to sit down with you and discuss some tax-reduction strategies you can take before 2012 ends to get yourself in tip-top tax shape. Because we work with Chevron executives, managers, employees and retirees, we're knowledgeable about your various compensation plans and benefit offerings, plus other issues specific to Chevron employees (in addition to the retirement, investment, and estate planning issues everybody faces). In fact, chances are you may know one of our Chevron clients and you can ask them how working with a financial planner has helped them.

Please contact us at (925) 659-0217 with specific questions or to schedule a time to meet in our San Ramon, Point Richmond or Houston, TX offices. Also, follow us on LinkedIn.