There's still time for 2012 deductions
Year-end tax planning has gotten a bit more complicated with all the talk of the "fiscal cliff." However, there are still tried-and-true year-end moves to make now, which can help lower your tax bill in April.
Give appreciated stock or fund shares to charity. Capture the holiday spirit with the help of Uncle Sam. One way to lower your tax bill in April is to donate appreciated securities, like stocks, bonds or mutual funds, to a charity. You'll write off the current market value (not just what you paid for them) and escape taxes on the accumulated gains. There is no overall limit on itemized deductions for 2012. For 2013, the overall limit on itemized deductions is scheduled to be reinstated, and fiscal cliff negotiations may put further deductions in place.
That means deductions are likely to be more valuable in 2012 than in 2013. Remember that too many itemized deductions can trigger the alternative minimum tax. Donor-advised funds are a great solution for quick year-end planning. If you know you want the deduction but can't make the decision as to which charity you want to use, a donor-advised fund allows you to capture the deduction now and decide on the charity later.
Take advantage of low capital gains rates. It might make sense to sell certain taxable assets in 2012, especially for joint filers with adjusted gross incomes of $250,000 or more (or $200,000 for single filers). The Affordable Care Act will levy a new 3.8 percent surtax on net investment income in 2013, and the fiscal cliff negotiations could add to the pain, potentially bringing the top capital gains rate to 23.8 percent. If you are planning to sell an asset, like company stock, or have a large concentration in one holding, 2012 may be the year to lock in the gain.
Sell losers. If you have investment losses in a taxable account, now may be the time to use those losers to your advantage. You can sell losing positions to offset gains that you have taken previously in the year in order to minimize your tax hit. If you have more losses than gains, you can deduct up to $3,000 of losses against ordinary income. If you have more than $3,000 of losses, you can carry over that amount to future years.
Avoid getting soaked by a wash sale. If you are starting to clean up your non-retirement accounts to take losses, don't get soaked by the "Wash Sale" rule. The IRS won't let you deduct a loss if you buy a "substantially identical" investment within 30 days, what's known as a wash sale. To avoid the wash sale, wait 31 days, and then repurchase the stock or fund you sold, or replace it with something that is close but not the same (hopefully something cheaper, like an index or an exchange-traded fund).
Take Required Minimum Distributions. According to Fidelity Investments, as of Nov. 9, nearly two-thirds of all IRA holders hadn't taken their full required minimum distributions, which must be withdrawn by Dec. 31. There is one exception: Taxpayers taking their first required payout may do so by April 1, 2013. The penalty on not taking your required minimum distribution is steep -- 50 percent on the shortfall. For more, check this IRS FAQ at 1.usa.gov/P4SmAd
Consider converting Traditional IRA into a Roth IRA. A conversion requires that you pay the tax due on your retirement assets now instead of in the future. The advantage of a conversion in 2012 is that the amount subject to tax would be taxed at a presumably lower rate than the scheduled 2013 rates, and would ensure that future distributions are tax-free. Whether a conversion makes sense for you depends on a number of factors, including if you can pay the tax due with non-retirement funds.
So, regardless of whether Washington lawmakers take us over the cliff, you can still save on taxes and for the future with these year-end strategies!
Happy New Year!
Jill Schlesinger is the editor at large for CBSMoneyWatch.com and writes this column for Tribune Media Services.