It’s hard to believe, but we’re less than two months away from 2013 now. Which means it’s time to take stock of your tax situation as best you can, and start plotting your tax planning moves. Now’s the time to strike: Lots of people are in the same boat, and it gets harder to make an appointment with tax professionals, because you’re competing with their other clients for their time, and because they have holiday plans with their families, too.
I don’t remember a time when there was more uncertainty over the tax scheme in the years ahead. Both parties have very different visions about where they want this country’s tax code to go – and they are at variance with the current law, which will automatically enact a substantial tax increase in January that nobody wants. But the two sides may not be able to come to a year-end agreement – particularly if the opposition party wants to hamstring whoever wins the White House this year by sticking them with the sequestration tax increases, spending cuts, and probable recession that would result.
Despite the uncertainty, though, there are some moves I’m comfortable suggesting:
- Harvest those tax losses. If you have an investing portfolio with both winning positions and losing positions in it, you can use your losses to cancel out your gains – reducing or eliminating your capital gains tax for the year – a technique called “tax loss harvesting.” If you have more losses than gains in any given year, you can deduct those losses against future capital gains. If you have no capital gains to deduct them against in the following years, you can use those losses to cancel out up to $3,000 of income per year.
- Sell winners. Consider doing so even if you can’t offset capital gains with losses: Taxes on capital gains are set to increase by as much as 33 percent come January 2013, when the tax on long-term gains will increase from 15 percent to 20 percent.
- Close out any sales of closely-held businesses you’re trying to put together, for the same reason. If you sign over appreciated stock in your own corporation, or assets at a profit, delaying the transaction from December to January could be very expensive.
- Remember the 3.8 percent surtax on capital gains. If you make more than $200,000, or $250,000 as a married couple, it’s even more important to move gains into this year to avoid the 3.8 percent tax on capital gains imposed by the Affordable Care Act. That’s in addition to the across the board capital gains increase.
- Careful with mutual funds. Are you considering a mutual fund? Look up the funds’ distribution date, which often falls in November. If the fund has a lot of embedded capital gains, you could get stuck with a big taxable distribution. That means you will have to pay capital gains tax on money other people made. That doesn’t mean mutual funds don’t make sense. Just go in with your eyes open.
- Do you control a C corporation? Take as much dividend income as you can this year. If you wait until next year, you could wind up paying 39.6 percent on those dividends, rather than the 15 percent on qualified domestic dividends you get this year.
- Oops… did I say 39.6 percent? Add the 3.8 percent Medicare surtax to that figure if you wait until next year. That’s what will happen under current law, unless Congress intervenes. I suspect it will… I don’t think either Republicans or Democrats want a full sunset of the Bush tax cuts, plus the Medicare surtax to hit all at once. But Congress has done dumb things before – and you can’t ignore what the law on the books says now.
- Self-employed? Try to push income to 2012 rather than take in 2013, if possible. That will save you 2 percent on your self-employment tax, since the employee’s share of the tax is increasing by 2 percent as of January 1, from 4.2 to 6.2 percent.
- Schedule an AMT review with your tax advisor. You may need to make some moves with stock options, or push certain deductions to a non-AMT year. You may also want to accelerate income to the current year, or hold off on constructive receipt of income until 2013, depending on your overall situation. Everyone is different when it comes to the AMT.
- Do you itemize? Schedule a Pease limitation review with your tax advisor. You might want to push deductions to this year rather than risk losing the ability to take certain deductions next year
These are just the basics. There is a lot to discuss when it comes to taxes as we come to the end of the year. We’ll certainly be covering them, looking at these in more detail and digging into other year-end tax planning issues, too. Keep tuning in to my blog Penge Snak!