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Hang-Gliding Over the Fiscal Cliff: A Couple Year-End Tax Planning Ideas

December 19, 2012

There is no one-size fits all approach to tax planning.

When you open the newspaper (or in my case Google News), everyone is talking about the fiscal cliff. What will happen with tax rates, itemized deductions, AMT, capital gains and the Estate Tax? There are so many unanswered questions that providing clients with year-end tax advice may involve some what if’s. There is no one-size fits all planning and the time value of money is so low that it seems to blow many traditional strategies out of the water. Even reverse thinking like accelerating income now and deferring deductions into 2013 isn’t a sure bet for future tax savings.

Since the presidential election, we now have a better sense about some changes we can probably expect in 2013:

  • The 3.8% Medicare Surtax on investment income and .9% Surtax on Wages will come into play for taxpayers with adjusted gross income (AGI) in excess of $250,000.
  • Tax Rates will go up, especially for taxpayers making more than $250,000.
  • The lifetime gift/estate tax exemption of $5.12 million per taxpayer and the gift/estate tax rate of 35% will be replaced with something much less favorable.
  • Capital gains rates will increase from 15% to 20% for higher income taxpayers.
  • Itemized deductions such as mortgage interest and charitable contributions may be limited for “high-income” taxpayers.

What can we do before the end of the year?

Think about a Roth Conversion. With tax rates going up, not too many taxpayers can safely say that they expect their retirement tax rate to be lower than their current tax rate. Look into converting a traditional IRA to a Roth.

Give Appreciated Stock to Charity. Look at your appreciated stock and think about giving them to charity. By gifting appreciated stock to a charity, you will receive an itemized deduction equal to the fair market value of the stock, NOT the price you paid for it.

Consider Present Interest Gifting. Take advantage of the $13,000 annual gift exclusion and look into transferring wealth without paying transfer taxes.

Think ahead about Estate Planning. You can setup investment vehicles now to utilize your $5.12 million lifetime exemption. Gifting now could save you lots of tax dollars.

These are just a couple of ideas to help you to hang-glide over the fiscal cliff until Congress makes some concrete decisions. Read Dave’s article titled “Tax Planning: What to do before Year-End” to read more on this topic.

Please contact any member of our Wealth, Tax and Advisory Group or call 888-KLR-8557 for help analyzing your individual situation and implementing a great strategy.

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