Tax planning this year, you have got to be kidding me! Fiscal
cliff, mandated cuts and election uncertainty - how do you plan
for that? Unless Congress acts, tax rates will go up next year,
many more individuals will be snared by the alternative minimum
tax (AMT), and various deductions and other tax breaks will be
unavailable including the expanded tax credits for higher
education. Individuals will face higher tax rates next year on
their income, including capital gains and dividends, and estate
tax rates will be higher as well.
Well, all of these factors do make it difficult this tax
year end but that doesn't mean we should do nothing. Here is a
checklist for items that you might want to consider before year
end.
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Tax Loss Harvesting.
As always, take the year end to review your investment
holdings to determine if there are gains or losses that you
might want to take this year. Net losses up to $3,000 can be
deducted against other income on the tax return. Capital
gains have a favorable 15%/0% tax this year. Next year
capital gains are scheduled to go up and an additional 3.8%
tax may apply to the earnings if you are a
'high-income-earner'.
-
FSA changes.
Keep in mind that beginning next year, the maximum
contribution to a health FSA will be $2,500. And don't forget
that you can no longer set aside amounts to get tax-free
reimbursements for over-the-counter drugs, such as aspirin
and antacids.
-
HSA's.
If you become eligible to make health savings account (HSA)
contributions late this year, you can make a full year's
worth of deductible HSA contributions even if you were not
eligible to make HSA contributions for the entire year. This
opportunity applies even if you first became eligible in
December.
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Roth Conversions.
Consider, if appropriate, converting traditional IRAs to Roth
IRAs this year to avoid potentially higher individual rates
in coming years. IRA distributions themselves will not be
income that will become subject to that 3.8% investment
income tax but it might raise your income level to that which
would subject your what would have been otherwise 'exempted'
from the tax income to that which would be subject to the
tax!
-
RMD.
Make sure you have taken your required minimum distribution
from your retirement accounts if you are age 70-1/2 or older
this year. Failure to take the minimum can result in a 50%
penalty on the amount that was failed to be distributed.
Remember the conversation above about the Roth conversion
strategy; the same would apply to the consideration of taking
your first year RMD by April 1st of next year. If you wait
and have to take two distributions next year (your 2012 you
postponed plus the 2013 that would be required), you could
boost income up to where your investment income gets hit with
the 3.8% extra tax. So maybe you want to take the
distribution this year rather than waiting.
-
Medical Deductions Will Have to Exceed 10%
. Yes, next year to get a medical deduction you must have
qualified medical expenses that exceed 10% of your adjusted
gross income. Of course, you still need enough itemized
deductions in total to get tax benefit from itemizing, that
hasn't changed! So, if you have any 'discretionary' qualified
medical expenses that you were planning to take next year,
you may want to take them this year!
-
Under withholding Penalties
. If you are facing an under withholding penalty because you
haven't taken enough out of your paycheck yet, consider
taking more out of the remaining paychecks of the year so
that you will have withheld enough to avoid any
penalties.
-
Gifts.
Gifts of $13,000 per year can be made to any number of
individuals. If your spouse also gifts, a family could gift
up to $26,000 to any individual. If a gifting strategy is
appropriate or desired, do it before December 31st to use up
the annual gift amount. Remember, if that gifted asset was
property (stocks and bonds) that produces income subject to
that 3.8% investment income tax, then gifting that asset to
someone who would have an income level not be subject to that
tax (AGI $200,000 for individuals, AGI $250,000 for married)
might be advantageous for the 'family'. I am talking
'irrevocable' gifting of a 'present interest' here. There are
rules about 'parking money' with family members and income
recognition requirements under imputed interest rules that
might apply so be careful if you were thinking about that
kind of a move to avoid the 3.8% tax!
I hope this gives you some ideas to review before year end.
This is certainly not an all-inclusive list as any strategy
needs to be considered in the 'whole of your financial
circumstances'. For the tax loss harvesting strategy I always
like to remind people that you shouldn't let the tax tail wag
the investment dog. Review the investments on their investment
merits not just their 'tax benefit'.
With respect to the election, fiscal cliff and other matters
of uncertainty, once the dust settles it will be time to review
the totality of our tax circumstances with better clarity, I
hope. Lol.
In Part two we will look at "Business Year End Tax
Moves".
David Bergmann, CFP
®
, EA, CLU, ChFC
Managing Principal
The David Bergmann Group
Marina Del Ray, CA