(MCT)—As tax return season starts, many of us are thinking of what we could have done last year to lower our taxes and what we can do now to lower taxes in the future. While it may be too late to change 2011 taxes, it’s the perfect time to plan moves to make in 2012.
As it stands now, when 2013 gets here, taxes are going up. The tax cuts created by President George W. Bush expire this year and brackets return to the previous rates of up to 39.6 percent in 2013 from 35 percent now. It affects lower income taxpayers too. The 10 percent bracket disappears and 15 percent becomes the lowest tax bracket. In addition, the child tax credit expires and capital gains rates go back to 20 percent from zero to 15 percent this year.
The only thing that could stop these changes is Congress. Being an election year, taxes are a hot topic. But it’s also a topic that may not see much action with a possible change in leadership after the election. A possible gridlock and unknown outcome make it important to take planning into your own hands to head off the potential tax hike.
Here are some possible actions to take this year if a tax hike is imminent:
1. Convert traditional IRAs to Roth IRAs. While this decision is based on each individual’s situation, those that are considering converting may want to pull the trigger this year. Conversions are considered ordinary income so they’ll be taxed at the individuals’ current tax rate. For the wealthy, it would be better to be taxed at 35 percent instead of 39.6 percent.
2. Take income earlier. If you are able to control when income is received, taking it in 2012 could result in it being taxed at a lower rate.
3. Sell profitable investments. If the capital gains tax is headed to 20 percent in 2013, some individuals may want to consider cashing in gains at 15 percent this year.
4. Reduce dividends. If qualified dividends become taxed at the taxpayer’s tax rate in 2013 instead of zero to 15 percent now, some individuals may want to rebalance their portfolio to put investments that pay no or lower dividends in their taxable accounts and higher dividend investments in tax-deferred accounts such as 401ks and IRAs. On top of this, in 2013 investment income would be taxed an additional 3.8 percent for those with incomes over $200,000 or $250,000 for married filing jointly. This includes interest, dividends, capital gains and rents. The tax is part of the health care reform plan to help the Medicare program.
Tax planning in a time where the future is unknown is difficult, but knowing what could change can help anyone prepare now to make changes to their finances if needed.
Dan Serra is a financial planner with Strategic Financial Planning Inc. in Plano, Texas.
Distributed by MCT Information Services