‘Cliff’ com­pli­cates year-end plan­ning

De­spite un­cer­tainty on what 2013 brings tax-wise, ex­perts ad­vise ‘long view.’

Austin American-Statesman - - BUSINESS - By David Ranii Raleigh News & Observer

The fis­cal cliff has made year-end fi­nan­cial plan­ning es­pe­cially daunt­ing this year.

It’s not clear what Congress and the White House will do to head off a sig­nif­i­cant re­duc­tion in fed­eral government spend­ing and the ex­pi­ra­tion of Bush-era tax cuts that are sched­uled to take ef­fect Jan. 1. Nor is there any clar­ity on what al­ter­na­tives Congress might pur­sue.

“We’re right in this no­man’s land,” said Frank Smith, a Raleigh, N.C., fi­nan­cial plan­ner.

Nev­er­the­less, some in­vest­ment ad­vis­ers say the prospect of the na­tion plung­ing over the fis­cal cliff isn’t cause for over­haul­ing a sound in­vest­ment port­fo­lio.

“Take a long view. This is some­thing that will pass,” said Chip Hymiller, a prin­ci­pal at Bea­con Fi­nan­cial Strate­gies, a fi­nan­cial plan­ning and in­vest­ment firm. “A longterm in­vest­ment strat­egy shouldn’t be in­flu­enced by shorter-term is­sues like this. This is go­ing to be solved at some point and life will go on.

“Usu­ally, the mar­ket’s de­cline is the re­sult of some sort of sur­prise,” Hymiller added. “This is def­i­nitely not a sur­prise.”

Ex­perts say there are some steps in­vestors should be con­sid­er­ing given the like­li­hood of higher taxes next year.

“This is very com­pli­cated,” said Kathy Krae­blen, a Raleigh-based se­nior wealth plan­ner with PNC Wealth Man- age­ment. “There is no cookie-cut­ter ap­proach to fi­nan­cial man­age­ment. Ev­ery­one’s sit­u­a­tion is dif­fer­ent.”

More­over, the prospects of higher taxes next year has trans­formed the land­scape.

“Throw out all of the typ­i­cal year-end plan­ning strate­gies that we’ve had in the past,” said Melissa Labant, tax di­rec­tor at the Amer­i­can In­sti­tute of CPAs. “Throw them out the door.”

For ex­am­ple, a typ­i­cal year-end tax ma­neu­ver would be to sell off losers in your in­vest­ment port­fo­lio. This year, ex­perts say, that’s not a good idea.

“Don’t run out and trig­ger cap­i­tal losses to off­set cap­i­tal gains or or­di­nary in­come” Labant said, given that this year’s tax rates on both cap­i­tal gains and or­di­nary in­come are likely to look like a bargain com­pared to the rates that take ef­fect in 2013.

“I’m con­cerned that a lot of tax­pay­ers are in the habit of tak­ing cer­tain year-end plan­ning steps ev­ery year and that they’re au­to­mat­i­cally go­ing to do the same thing this year,” Labant said. “That would be their big­gest mis­take.”

What makes the cur­rent sit­u­a­tion tricky is that peo­ple have un­til Dec. 31 to ad­dress tax is­sues that may not be re­solved be­fore the end of the year.

Although Congress con­ceiv­ably could end up ex­tend­ing cer­tain dead­lines for tax­pay­ers, “it’s un­likely and I wouldn’t rely on it,” Labant said. “If you want to make changes (for your 2012 taxes), you should plan on tak­ing those ac­tions by Dec. 31.”

Here are a few tax- in­spired strate­gies worth con­sid­er­ing as 2012 draws to a close:

Cap­i­tal gains: Take ad­van­tage of his­tor­i­cally low taxes on longterm cap­i­tal gains, which ap­ply to stocks and other in­vest­ments owned for at least a year.

Re­gard­less of what tax bracket you’re in, “the prob­a­bil­ity is that (taxes on) cap­i­tal gains are go­ing up,” said Janet Fox, pres­i­dent of ACH In­vest­ment Group.

Cur­rently, in­di­vid­u­als with or­di­nary in­come above $35,350, or mar­ried cou­ples with or­di­nary in­come above $70,700, pay 15 per­cent in cap­i­tal gains taxes. Those be­low that level pay no cap­i­tal gains taxes. Or­di­nary in­come in­cludes all in­come ex­cept for in­come el­i­gi­ble for re­duced tax rates, such as div­i­dends and long-term cap­i­tal gains.

In ad­di­tion, a 3.8 per­cent Medi­care sur­charge tax on cap­i­tal gains is sched­uled to take ef­fect for high-in­come in­di­vid­u­als in 2013. Con­se­quently, it makes sense to look at sell­ing stocks that have ap­pre­ci­ated sig­nif­i­cantly be­fore the end of the year to avoid a higher tax bill down the road.

IRA with­drawals: If you’re older than 59 ½ and plan­ning to tap your IRA for cash in the neart­erm, con­sider do­ing it be­fore the end of the year.

If tax brack­ets on or­di­nary in­come rise next year — as many think they will — then tak­ing cash out now would mean a lower tax bill, ex­perts say. That’s be­cause IRA dis­tri­bu­tions are taxed as or­di­nary in­come.

Once you’re older than 59 ½, you can draw money out of your IRA with­out paying a penalty.

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