‘Cliff’ complicates year-end planning
Despite uncertainty on what 2013 brings tax-wise, experts advise ‘long view.’
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.