The 2012 election is over, and Americans find themselves in an unsure financial environment. The country is heading toward a “fiscal cliff” — a series of significant tax increases and automatic spending cuts that will be triggered at the end of the year. Congress and the President are negotiating a compromise solution to prevent that, but no one knows what it will involve, or if they’ll be successful at all.
With that in mind, we’ve asked several of our Wealth Managers to weigh in with the advice they’re giving clients in anticipation of the approaching deadline.
Note: These are general recommendations and each person’s financial situation is unique, so it’s important to speak with your Wealth Manager before making any decisions. Also, many of these recommendations are based on the information we have right now, and could change as a result of the negotiations in Washington, D.C. In light of that, we will be holding a special webinar to update you on where things stand at that time. Click the banner on the right to reserve your spot.
Find ways to bring in additional income this year
Mindy Gasthalter: With the likelihood that taxes will go up in 2013, it might be a good time to bring in additional income this year, under the current rates. One of my clients had stock options and wasn’t going to use them. So I suggested they bring in that income now, with the suspicion that tax rates will go up next year.
William Bissett: A lot of companies these days pay year-end bonuses early the following year. If that’s the case with you, you might consider asking if yours could be paid in 2012 so it doesn’t get hit with the 2013 tax rates.
Deb Kriebel: Personal exemption and itemized deduction phase-outs are scheduled to return for higher-income individuals next year; when combined with other scheduled tax rate increases, it’s especially beneficial to take additional bonuses or optional income payments in 2012.
Jeff Troll: If you’re a small business owner who reports using the cash basis method of accounting, consider trying to collect accounts receivable during 2012. Along the same lines, if you’re cash basis, consider delaying paying your expenses into 2013.
If you own a business that is not a pass-through entity, you should consider trying to accelerate expenses and delay income, as there’s a strong possibility that corporate tax rates will go down next year. (During the election campaign, President Obama proposed dropping it from 35% to 28%.)
Michael Green: Clients who are reliant on IRA distributions for cash flow needs may wish to fund a portion of their 2013 cash flow needs by taking extra withdrawals in 2012, under the lower tax rate regime.
Consider converting your Roth IRA
Jake Mason: If tax rates are rising, this may be a good window to complete an IRA conversion and get money into a Roth so you pay at the current rate instead of a potentially higher future rate.
Michael Green: Assets converted now into a Roth would avoid not only the possible higher future income tax rates, but reduce the risk that future retirement account distributions will push you over the “high income” line that triggers the new 3.8% Medicare Unearned Income Tax.
Mindy Gasthalter: Clients might also consider doing larger Roth conversions than they might have done in the past, so they can lock in today’s tax rates.
Increase contributions to your Roth IRA
William Bissett: If you think taxes are going up permanently, then you should consider maximizing your contributions to your Roth IRA, since contributions are taxed when they go in, allowing you to avoid those anticipated-to-be-higher tax rates in the future.
Consider harvesting capital gains now
Jeff Troll: If your total income is expected to be over $250,000, then there will be a new Medicare surtax of 3.8% on most passive investment income. In addition, if the tax cuts expire, the top capital gains rate will also increase by 5%. So you’ll have a minimum capital gains tax increase of 8.8% (from 15% to 23.8%). In light of that, resetting your cost basis by realizing your capital gains before the end of 2012 could save you significant income tax dollars.
It’s also important to note that unlike tax loss harvesting, when you tax gain harvest, you don’t have to wait 30 days to buy back the security — it can be done instantly, getting the tax benefit while avoiding any time out of the market.
Now might be a good time for major optional medical procedures
Deb Kriebel: Presently, clients who itemize deductions may deduct their medical expenses exceeding 7.5% of their income. Effective January 1, 2013, that threshold rises to 10%. So if you’re contemplating an optional medical procedure for 2012 or 2013 that costs enough to get over the threshold, it may be beneficial to do it (and pay for it) before year-end.
Take capital losses next year rather than this year
Mindy Gasthalter: In the past, we’ve recommended harvesting capital losses at the end of the year. But if capital gains tax rates go up as we expect, they would actually be more valuable next year.
William Bissett: If you can defer your capital losses, that’s a good strategy this year. Tax losses will be 33% more valuable next year than they are this year if the long term capital gains rate increases to 20% from its current 15%.
Consider holding off on charitable contributions
Jeff Troll: While it’s good to accelerate income into 2012 before tax rates rise, it may also make sense to defer deductions into 2013, as the deduction would be worth more if it applies against higher tax rates. Accordingly, delaying deductions like charitable contributions until next year could make sense (where you actually wait until 2013 to write the check). However, you need to balance this with the fact that comprehensive tax reform could reduce or eliminate the value of certain deductions moving forward.
Charitable gifting might wait, but major family gifting should happen now
Deb Kriebel: In 2013, the federal gift tax exemption will fall from $5.12 million in 2012 to just $1 million. In addition, the current gift tax rate will increase from 35% to a top rate of 55%, and the generation-skipping tax rate will rise to 55%. So for my clients who were planning very large (e.g., multi-million dollar) gifts, 2012 may be the opportune time to work with their estate attorneys and CPAs to complete those gifts.