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5 Steps To Consider Before Year-End

December 3, 2012

With fiscal cliff negotiations just heating up, much about next year’s tax schedule is up in the air. Most of the likely tax changes will hit only the wealthy. Yet there is no saying how this will sort out. Here are five steps to consider before year-end:

Accelerate Income

It’s all but certain that you’ll pay more tax next year on dividend income and capital gains. But you may pay more on ordinary income too, a clear risk for wealthy households. Consider asking that any expected bonus be paid this year and if you are taking distributions from an IRA consider pulling out next year’s money before year-end.

Convert a Traditional IRA to a Roth

If you believe tax rates will be higher next year, the cost of converting will be lower if you act now. You can always change your mind and reverse the conversion next year if you find that your tax rate has not gone up.

Make Gifts Now

The estate tax and lifetime gift tax exemption is set to drop to $1 million from just over $5 million and the maximum tax on amounts over the exemption is set to increase to 55% from 35%. A deal likely will reach some middle ground. But estates will be harder to shield going forward.

Plan to Live on Less Next Year

Marginal income tax rates are going up for top earners. Others will feel the bite of higher payroll taxes as the two-year break in Social Security payments runs its course and workers’ portion jumps back to 6.2% of pay from the current 4.2%.

Pay Next Year’s School Tuition Now

The American Opportunity Tax Credit, worth up to $2,500, is set to disappear and there is no evidence Congress will save it.

 

Read more: http://business.time.com/2012/11/21/5-tax-moves-to-make-by-yearend/#ixzz2DT5XRb3F

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