5 tax moves to consider before year end
Great uncertainty surrounds whether Congress and the president will compromise on a tax package before next year. Even if they do, certain types of taxes could rise for some investors starting in 2013. Tax expert Bob Keebler suggests five moves that make sense now:
1. Make significant gifts. The 2012 federal lifetime gift and estate tax exemptions of $5.12 million for individuals ($10.24 million for married couples) will fall to $1 million ($2 million for married couples) unless Congress acts to increase them. Talk with your advisor about making significant gifts in 2012 to take advantage of today’s much higher limits. Couples worried about giving away money they may need during their lifetime might consider gifting to a spousal access trust rather than directly to children or other heirs.
2. Accelerate income, delay expenses. If your income taxes rise in 2013 — which many high-income taxpayers will likely experience, regardless of whether Congress acts — it may make sense to pull more income into 2012 in order to pay 2012 rates on it. Likewise, you may want to delay certain deductible expenses since those deductions could be worth more in 2013 and beyond. Keep in mind that Congress may reduce or limit some deductions for 2013 or in future years. Consult your Ameriprise financial advisor to determine what makes the most sense for you.
3. Set up a tax-deferred retirement plan. Retirement plans, including profit-sharing and defined benefit plans, provide tax deferral on contributions that will become even more valuable if income taxes rise next year.
4. Convert a tax-deferred retirement account to a Roth. Since Roth IRAs are funded with money that has already been taxed — and provide tax-free growth and withdrawals in retirement once requirements are met — consider converting at least a portion of your traditional IRA(s) to a Roth in 2012 to help protect your savings from the real possibility of tax increases. There are no income limitations on Roth conversions, unlike contributions, so this option is available to everyone. But don’t wait until the last minute to do this since the process takes time. Also, if you do convert to a Roth before year end, remember that you’ll have the opportunity to recharacterize (convert back to a traditional IRA) later if you change your mind.
5. Consider harvesting long-term capital gains. The top rate on long-term capital gains could rise from 2012’s 15% to 23.8% in 2013, if no action is taken. This means if you are considering selling appreciated assets in the near term, it may be better to do so in November and December of this year to lock in this year’s rates, instead of waiting until next year. (Keep in mind that investors with modified adjusted gross income of more than $200,000 — $250,000 for married couples — are expected to face a new 3.8% Medicare tax on net investment income starting in 2013, regardless of whether a compromise is reached.) Talk with your Ameriprise financial advisor about whether it makes sense to sell any of your investments with long-term capital gains for tax purposes before year end.
Ask your Ameriprise financial advisor about how these and other opportunities can help you feel more confident about your finances in the new year.
This information is being provided only as a general source of information and is not intended to be used as a primary basis for investment decisions, nor should it be construed as advice designed to meet the particular needs of an individual investor. The information and opinions provided are believed to be reliable at the time given, but accuracy and completeness cannot be guaranteed. Please seek the advice of professionals as appropriate to evaluate any specific information or advice.
Bob Keebler is not affiliated with Ameriprise Financial.
Neither Ameriprise Financial nor its affiliates may provide tax or legal advice. Consult your tax advisor or attorney regarding specific tax issues.
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