Canty Financial Management Offers Strategies for Year-end Tax Planning before "Fiscal Cliff"

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A combination of half-trillion-dollar governmental spending cuts and tax increases for all Americans will automatically go into effect in January if Congress does not reach an agreement on a solution. It is therefore wise to plan today, for an environment of higher taxes down the road.

Many assume that, in one way or another, taxes will go up. At this time, no one is certain where the changes will occur and how they will affect us individually, but it is expected that changes will impact everyone on some level.

The reality of the pending “Fiscal Cliff” looms large as 2012 draws to a close. For taxpayers, there are many questions, but very few black and white answers. A combination of half-trillion-dollar governmental spending cuts and tax increases for all Americans would automatically go into effect in January if Congress does not reach an agreement on a solution.

Many assume that, in one way or another, taxes will go up. At this time, no one is certain where the changes will occur and how they will affect us individually, but it is expected that changes will impact everyone on some level. With this situation in mind, there are a few actions to consider while this low-tax-rate environment still exists.

Accelerate income: Absent Congressional action, the tax rates on qualified capital gains and dividends are scheduled to increase significantly after 2012, so a reversal of typical tax planning strategies is in order. What's at stake is the potential elimination of the zero-percent capital gains tax rate for modest-income taxpayers, and for higher-income individuals, the possibility of higher tax rates and the new Medicare surtax. Typical advice on harvesting tax losses is now turned upside down: recommendations now look towards selling winners to take advantage of 2012’s lower capital gains rates that are set to rise in 2013.

In addition, taxpayers should consider potential sources of income, and think about taking that income in 2012 at the known tax rates versus rates that will almost certainly move higher in 2013. Options include: sale of outstanding installment contracts, receipt of bonuses before January, redemption of US Savings Bonds, Roth conversions, acceleration of debt forgiveness income, maximization retirement contributions.

Defer deductions: Consider items that are typically paid in December. Postponing those expenses until after January 1st, will shift the deduction into next year, when tax rates are expected to be higher. Another suggestion is paying the last state estimated tax installment in 2013.

Shift Charitable donations: Larger gifts to charities would be more valuable next year when income tax rates are expected to be higher.

Consider fixed asset purchases and elections: Any fixed assets purchased and placed in service before the end of the year will qualify for either Section 179 or regular depreciation. The tax planning technique can be safely postponed until after the year when preparation of the return is done. By then, the "fiscal cliff" negotiations should be over, and a strategy can be formulated on the impact of each method of depreciation. The important thing is that assets must be placed in service prior to 12/31/12.

Take advantage of the American Opportunity Credit: The Hope credit was revised in 2009 to create the American Opportunity Credit which will expire when 2012 ends. The AOC is available for the first four years of post –secondary education. Eligible taxpayers may want to front-load paying 2013 education expenses before year-end 2012 to take advantage of the credit.

Direct annual to 529 plans: Taxpayers may direct tax-free gifts of $13,000 to each child or grandchild directly into 529 accounts. These accounts allow tax-free accumulation of investments in savings accounts earmarked to pay for higher education expenses. In addition, the New York State 529 plans will generate a tax credit for contributions up to $10,000. per taxpayer per year.

It is possible that lawmakers may simply extend the current tax rules for six months to give them more time to address the long-term problems that led to the crisis in the first place. Yet, the same questions about raising taxes and cutting spending will come back up as resolution measures for the US Fiscal crisis are negotiated. This situation makes tax planning more difficult than ever this year. However, it is wise to plan today, for an environment of higher taxes down the road.
Every situation is unique and a qualified tax planner can assist in developing these strategies.

Maureen Walsh is an Enrolled Agent, and Investment Advisor Representative with Canty Financial Management, Inc. The firm is led by Bill Canty, CFP®, CPA and offers Investment Advisory, Tax
Preparation services in Ballston Spa, NY and Naples, FL.

Planning and Tax Preparation services in Ballston Spa, NY and Naples, FL

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Maureen Walsh

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