By Joseph E. Balmer   |   December 15th, 2012

Financial Cliff Poses Several Strategies To Consider For End Of Year Tax Planning

tax planningThe end of the year is always a good time to speak with your financial advisor and discuss any potential last minute tax planning that may be appropriate before the new year begins.  This year is extremely unusual due to the tax cuts set to expire at the end of the year as well as federal programs that are to be cut.  Beginning next year, federal income tax rates are set to increase and the capital gains and dividend tax rates are also set to increase.  The federal estate/gift exemption is set to revert back from $5,000,000 to $1,000,000.  This “fiscal cliff”, as it has come to be known, is set to commence January 1st of 2013 unless Congress and the President reach an agreement before then.  If one assumes that it is unlikely that an agreement will be reached before the end of the year, there are a number of strategies to consider.

Tax Planning Considerations

It is unlikely that anyone’s income tax rates will go down in 2013 and very possible that income tax rates will go up.  Therefore, the traditional strategy of deferring income and accelerating deductions becomes just the opposite.  One should strongly consider accelerating income and deferring deductions to 2013.  To defer deductions into 2013, one may want to delay paying tax deductible expenses such as medical bills and charitable donations until January, wait to sell off poor investments which provide losses, and fund a Roth IRA this year instead of a traditional IRA.  To accelerate income, one may want to sell off investments with capital gains this year, accelerate IRA distributions, and try to receive any bonuses or dividends in 2012 instead of 2013.  If you are looking to sell a business or any asset with significant appreciation, you want to consider doing it this year to avoid the likely increase in capital gains tax. If you are looking to pass on a business to other family members or make significant gifts, you want to take advantage of the $5,000,000 estate/gift tax exemption which is scheduled to revert back to $1,000,000 in January.

Maximize Tax Planning By Speaking To A Financial Adviser

It appears that many financial planners and accountants are advising their clients to take advantage of the exemptions and credits that are in place now instead of trying to forecast the future.  Therefore, you should speak to your financial advisor and consider the suggestions above in order to maximize your tax planning benefits.

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Joseph E. BalmerAbout The Author: Joseph E. Balmer
Joseph Balmer manages the Probate, Trust and Estate Administration department at Dayton, Ohio, law firm, Holzfaster, Cecil, McKnight & Mues, and has been certified by the Ohio State Bar Association as a specialist in Estate Planning, Trust and Probate Law since 2006.

Tax Planning: Year End Alert for 2012
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