Year-end planning is a bigger challenge this year than in past years. Unless Congress acts quickly, tax rateswill increase next year and many more individuals will be affected by the alternative minimum tax (AMT), various deductions and other unavailable tax breaks. As a result of expiring Bush-era tax cuts, individuals are expected to face higher tax rates on their income next year, including capital gains, dividends, and estate tax.
To plan for your financial future, consider the following five tax planning tips:
- You may own appreciated-in-value stock and want to lock in a 15% tax rate on the gain, but you think the stock still has plenty of room to grow. In this situation, consider selling the stock and then repurchasing it. You’ll pay a maximum tax of 15% on long-term gain from the stock you sell. You also will end up with a higher basis (cost, for tax purposes) in the repurchased stock. If capital gain rates go up after 2012 and you sell the repurchased stock at a profit, the total tax on the 2012 sale and the future sale could be lower than if you had not sold in 2012 and had just made a single sale in the future. This move will definitely reduce your tax bill after 2012. Additionally, in 2013, you will be subject to the extra 3.8% tax on unearned income (unearned income Medicare contribution tax).
- If you believe a Roth IRA is better than a traditional IRA, consider converting traditional IRAs to Roth IRAs this year to avoid the likely tax hike next year. Although a 2013 conversion won’t be subject to the 3.8% tax on unearned income, it could trigger that tax on your non-IRA gains, interest, and dividends.
- Consider using a credit card to prepay expenses that can generate deductions for this year (e.g. charitable, real estate taxes, medical) to take advantage of the 7.5% floor vs. the 10% floor for 2013. For business expenses, the credit card must be in the business name to deduct prepaid expenses.
- Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes. You can give $13,000 in 2012 to any number of individuals, but you can’t carry over unused exclusions from one year to the next. The transfers may also save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax. Savings for next year could be even greater if rates go up and/or the income from the transfer would have been subject to the 3.8% tax in the hands of the donor.
- Lastly, set up a self-employed retirement plan if you are self-employed and haven’t done so yet.
These are just some of the year-end steps that can be taken to save taxes. Contact your tax professional to tailor a plan that works best for you.
Beth Davies, CPA, CTC
Pam Burns, CPA, CTC, FCPA
ProActive Tax and Accounting, Inc.
303 SW 140th Terrace
Jonesville, FL 32607