5 Year-End Tax Saving Strategies


As 2012 quickly comes to a close, now is the time to sit down and consider what you might do to reduce your April 15 tax bill. This year will be a particular challenge because Congress is planning significant changes to the tax laws and we may not know the new rules until after December 31st. However, we can make some assumptions that are very likely to be true and take actions now to reduce the tax bite for this year.
·         Capital gains. The federal tax on capital gains is set to rise from the current 15% to 20% next year. This presents an opportunity to reduce concentrated positions before yearend. If you have a large concentrated position in a stock, you’ll likely never have an opportunity to sell and diversify at a lower rate than this year. For example, say you own Apple with a $100,000 gain. If you sell this year your federal tax would be $15,000. If you wait and sell next year, the tax would rise to $20,000. If you fall under President Obama’s ‘rich’ category…individuals making over $200,000 or couples making over $250,000, next year you’ll be hit with an additional 3.8% Medicare contribution tax on the lesser of net investment income or the modified adjusted income over the threshold amount.
·         Charitable gifts. Another way to reduce your income taxes is to make gifts to qualified charities. This can be in the form of cash, securities or clothing items. If you’re thinking of gifting securities, it’s generally best to give appreciated securities such as the Apple stock in my example above. If you love your Apple stock you can repurchase it immediately meaning no thirty-one day waiting period applies. If you fall into Obama’s rich category, the Republicans have indicated they are willing to ‘raise revenue’ by eliminating deductions for high income earners. We have no idea what that means but it could mean a loss of part or all of the charitable deduction. If you are committed to giving annually to your religious organization or charity, consider making several years’ worth of gifts this year by setting up a Donor Advised Fund. This guarantees you’ll receive the full deduction this year but allow you to dole your gifts out over the next several years. In Birmingham, contact the Community Foundation of Greater Birmingham at (205) 327-3800. Note that to receive a full deduction this year, gifts of cash cannot exceed 50% of adjusted gross income while the limitation on appreciated assets, such as stocks, is thirty percent.
·         Retirement plan contributions. If you have not maxed out your contributions to your company 401-k you can use the remaining paydays to increase your investment and income tax deduction at the same time. You’ll need to contact your human resources department for their assistance in adjusting your payroll deduction.
·         Convert to a Roth IRA. When you convert a traditional deductible IRA to a Roth IRA, you create ordinary income. For high income taxpayers the tax bite will be much less this year than next. If it turns out not to be a good deal one feature under a Roth conversion is you are allowed to ‘reverse’ the transaction any time before filing your tax return for 2012. That gives you about eleven months from now to determine if it was a good deal.
·         Changes to Medicare. Don’t forget to review your Medicare plans to ensure you have the most appropriate plan based on your situation. The open enrollment period ends Friday December 7th
Meet with your accountant before the end of the year to see what other strategies may be available to reduce your 2012 taxes.