At Bell Wealth Management, we consider strategies to minimize taxes for our clients all year long. However, now is the time to make sure that everything that can and should be done, actually gets done.
This is not a normal year as it relates to tax planning. Due to fiscal cliff issues, we are not sure what tax rates are going to look like in 2013, and that is a challenge when it comes to planning.
Absent action from Congress, there are forty federal tax provisions that are set to expire at the end of the year. This chart highlights some of those scheduled changes.
*Applies to taxpayers over certain threshold amounts.
Here is a sampling of the issues we are thinking about as it relates to year-end tax planning:
Harvesting tax losses
Normally, it can make sense to realize capital losses in taxable accounts at the end of each year. These losses can be used to offset other gains that were taken earlier in the year, or in the absence of realized gains, can be used to offset ordinary income (up to $3,000 per year). Currently, it looks like a realized loss may be more valuable next year when marginal tax rates could be higher. In other words, accelerating gains in 2012 and delaying losses to 2013 may be the better strategy for some clients.
For clients whose modified adjusted gross income (MAGI) is expected to fall close to $250,000 in 2013, we are considering certain strategies to keep them below that key threshold. For example, allocating the maximum allowable contribution to a 401k or SEP IRA is a good way to reduce taxable income.
Itemized deduction limitation
Beginning in 2013, itemized deductions may be phased out for high income taxpayers. Therefore, many deductions (including charitable deductions) may be more valuable in 2012 than in future years. This issue is further complicated by the fact that certain itemized deductions can trigger the alternative minimum tax (AMT), so please give us a call or consult your tax advisor before making taking any action.
Roth IRA conversion
Prior to the end of 2012, all taxpayers (regardless of income level) have the ability to convert some or all of their Traditional IRA to a Roth IRA. The two main benefits of the Roth are that distributions are tax-free and there are no required minimum distributions. When you convert to a Roth, the amount converted will be taxed as ordinary income in the year that you convert.
Non-qualified stock options
If you are in the highest marginal tax bracket and have vested NQSOs, it may be wise to exercise them prior to 2013 to avoid potentially higher income tax rates.
Concentrated stock positions
If you have been holding on to a large position in a single stock because you don’t want to realize the capital gain, now may be an excellent time to diversify at least a portion of that investment. No matter how solid your company seems to be today, a concentrated stock position always adds an additional level of risk to your future. Capital gains rates may never be this low again. Additionally, if you are dead-set against realizing gains, there are ways to diversify your risk without selling the asset outright.
Most tax experts do not believe that the estate tax threshold will fall back to $1,000,000, but for those with significant net worth (greater than $10M), there are some strategies that should be considered immediately in order to ensure that the appropriate structure is in place prior to year-end.