The End is Near

Tax Moves to Take Now

Big changes may come to income taxes next year. The media is full of discussions of the "fiscal cliff" and what lies ahead. At this point no one knows for sure what changes are in store.

Rates for ordinary income, dividends or capital gains could rise, perhaps even substantially. Some deductions could be curtailed. Inheritance or other taxes could be revamped.

With this backdrop, there's a danger that investors will over react and take actions that could damage their financial futures. But everyone should at least consider some measures before year-end.

For one thing, investors should focus on the possible rise in capital gains tax rates. If one has long-held positions with big gains, particularly if the holdings are in one or two stocks, now is a good time to consider realizing those gains at the low current rates and diversifying your portfolio. 

Everyone who is eligible for a Roth IRA or Roth conversion should at least consider it. And anyone who has a retirement plan at work or who could institute one should utilize it as fully as possible depending on their personal circumstances.

We don't know what the future holds but we should prepare as best we can.

Tax Planning

More Than An Afterthought

In the last minute rush to finish their taxes, many people throw in an IRA contribution without much thought. Tax planning in general and IRAs in particular deserve more care and attention. In growing our assets and preparing for retirement, we have four major levers: increasing income, spending less, improving investment results and minimizing taxes. IRAs can be useful in two of those four categories. Since the huge bear market, it is generally advisable for most people nearing retirement age to try to increase their savings. Correctly using the best retirement vehicles is one of the easiest steps to do this. Choosing which types of accounts to use is important and varies with each person’s needs. For starters, using a Traditional IRA provides a front end tax deduction for those eligible. Establishing a Roth IRA doesn’t provide the initial deduction, but in most circumstances earnings from the Roth come out tax free.  Traditional IRA distributions are taxed at the ordinary income tax rate.  Further, Roths don’t have a required minimum distribution after age 70 ½ as do Traditional IRAs. Getting these choices right and not running afoul of the complex rules can make a huge difference in how much money you accumulate.

Gift Taxes

 A Congress Bearing Unusual Gifts

For those inclined to be generous, Congress made it a lot easier last year. As part of the tax cut extension, Congress increased the estate tax exemption as well as increasing the gift tax exclusion. It is now possible for an individual to give $5 million without a gift tax. Each spouse could separately gift $5 million or for a couple, acting together, $10 million. The individual annual gift limit remains at $13,000. The extension is good for two years. No one knows what will happen afterwards. The $5 million figure could stay, it could revert to the previous $1 million or it could be any other number. Although anyone who watches Congress closely soon learns that it is difficult to predict Congressional actions, most observers believe that Congress won’t make retroactive changes to the tax law during this two year period. For wealthy individuals who are in a position to take advantage of the higher gift tax exclusion, the next two years may prove to be a uniquely favorable period.  Many possibilities have been opened up by these tax law changes and the window of opportunity could shut as quickly as it opened.