Filed Under:Life Insurance, Life Planning Strategies

6 tax opportunities to take advantage of now

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The “fiscal cliff” being discussed by politicians and the media is the collective impact of the expiration of certain temporary tax provisions and the commencement of automatic federal government spending cuts under the laws agreed to by Congress and the president. The concern is that this simultaneous raising of tax rates and spending cuts will harm a fragile economic recovery.

See also: Expert foresees end-of-year rush to implement tax avoidance strategies


Consider accelerating wage income. There will be higher taxes on wage income in 2013. Ordinary income tax rates are scheduled to increase 3 percent for most income levels and 4.6 percent for higher income taxpayers. Also, a temporary reduction in the Social Security tax from 6.2 percent to 4.2 percent is scheduled to expire, and starting in 2013, the health care law will increase Medicare tax from 1.45 percent to 2.35 percent for high-income taxpayers. Even if Congress agrees to hold the ordinary income tax rates at their current rates, the Social Security and Medicare tax increases will raise the tax burden on wage earners. Planning to minimize these taxes is a challenge, but if you have flexibility to accelerate wage income into 2012, that could be a wise plan.


ChangeConsider converting retirement assets to a Roth 401(k) or IRA. Roth assets are after-tax and generate tax-free income, subject to holding the account for five tax years and having attained age 59 ½. If you have a traditional 401(k) or IRA, you can convert that asset to Roth form by paying the tax on the gain or before-tax value of the asset. Roth IRA assets are also not subject to age 70½ required minimum distributions or RMDs, which further enhances the power of the tax-free Roth growth. While any conversion tax liability in 2012 will need to be paid with your 2012 income tax return, there could be considerable savings from converting in 2012 and paying the income tax at lower rates.


for saleConsider selling certain capital assets in 2012. In 2013 the top capital gains rate is scheduled to increase from 15 percent to 23.8 percent and the dividends tax rate from 15 percent to 43.4 percent. Even if tax rates are generally extended, the capital gains rate will increase to 18.8 percent when considering the new 3.8 percent tax on investment income for high-income taxpayers. (PPACA created a new 3.8 percent tax on investment income with income thresholds of $200,000 for individuals and $250,000 for joint filers.) As you consider your investment options for the remainder of 2012 and whether you want to sell any assets, you should consider how the current lower tax rates could benefit you. It may be time, while these rates are still in place, to sell the low basis stock that you have, particularly if you are planning to sell it at some point in the near future. If you like the investment and want to retain it, but also want to lock in the tax gain at the current rates, you can sell the investment and simply repurchase the same stock. “Wash sale” rules only apply to disallow losses when purchasing replacement stock.

investment taxPlan for the new 3.8 percent investment income tax. The new 3.8 percent tax on investment income was created under PPACA and becomes effective starting in 2013. The income threshold for this tax is a relatively high $200,000 for individuals and $250,000 for joint filers, but for those impacted, planning strategies can minimize this new tax burden. As described earlier, you can plan for the near term by selling assets before the tax comes into effect in 2013. However, you can also plan more strategically over time, by managing the creation of investment income for those years when your income is below the thresholds. A more strategic and longer term type of planning could also involve trying to shift the character of your income so that you largely avoid the tax. For example, by converting your IRA to a Roth IRA and paying the income tax in 2012, you can convert income that would otherwise push you into this tax into tax-free income that is not counted for these purposes.

For those who look at the high-income thresholds and think they cannot be impacted, it is important to understand that the income amounts are not indexed for inflation. As we saw with the Alternative Minimum Tax, what seems like a tax on those with higher income will likely become a broad-based tax after some period of time due to the natural effects of inflation on income.


Contribute to an IRA. Many individuals do not realize they can contribute to an IRA each year regardless of whether they are covered by a retirement plan at work and regardless of income. The only requirements for making a contribution to an IRA are that you have earned income of at least the amount contributed and you have not attained age 70½.

CharityUse IRA distributions to make charitable contributions. Under prior law that expired at the end of 2011, individuals age 70½ or older could use up to $100,000 per year of IRA distributions to make direct charitable contributions and avoid paying income tax on that amount. Absent this provision, the individual would have to include the IRA amount in income and then take a charitable deduction. Given the limitations on charitable contributions and itemized deductions under current law, it is very likely that this two-step process would result in the individual not receiving a charitable deduction in an amount to offset the income recognition. Since it is possible this rule will be reinstated retroactively, if you are taking RMDs from your IRA and also plan on making a charitable contribution, then consider making the charitable contribution directly from the IRA to the charity. Assuming you would make this charitable gift in any event, doing so directly will leave you open to the possibility that you’ll be eligible for any retroactive reinstatement of this provision.

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Nichole Morford

Nichole Morford
Managing Editor

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