News Column

Act Now to Avoid Possible 2013 Tax Hikes

Oct. 11, 2012

Staff --

tax day

Financial planner Rick Rodgers says income taxes are going up in 2013 -- and not just for those who earn more than $200,000 a year.

"Taxes are likely to be higher for everyone" says Rodgers, author of "The New Three-Legged Stool: A Tax Efficient Approach to Retirement Planning."

"We all know about the expiring Bush tax cuts, which may or may not be extended for everyone or just some," he says. "There are also new taxes that were part of the health-care reform law passed in 2010, the expiring payroll tax cut, the alternative minimum tax that already expired in 2011, and many other provisions that have expired or will expire at year end."

The upshot, according to Rodgers: Get ready to pay more.

He says there's still time to take advantage of 2012 tax rates, which may be the lowest Americans will see for some time.

Strategies that can be implemented before the end of 2012, according to Rodgers:

Roth conversion

Converting a traditional IRA to a Roth IRA creates a taxable event in 2012. All future earnings in the account will be tax-free, as long as you wait five years and are age 59-1/2 or older when you take withdrawals.

The biggest advantage is that transaction can be undone as late as Oct. 15, 2013. If the new Congress passes a major tax-reform bill next year that lowers tax rates across the board, you can put the money back into your IRA.

Harvest capital gains

Harvesting gains is similar to harvesting losses. Sell appreciated securities that you've held for at least 12 months to realize the long-term gain for tax purposes.

You can immediately repurchase the same asset because there is no wash sale rule for realizing gains. This allows you to pay tax on the gain in 2012, when rates are low, and establish a new cost basis in the asset to minimize increased gains that may be taxed at higher rates.

This strategy should appeal to anyone in the 15-percent tax bracket because capital gains are taxed at zero and may jump to 8 to 10 percent in 2013 if the tax cuts expire.

The strategy is also appealing to anyone subject to the Medicare surtax. If the current tax laws expire, the tax rate on long-term capital gains will jump from 15 percent to 23.8 percent (21.8 percent for assets held more than five years).

Pay medical expenses

If you usually itemize medical expenses, accelerate those expenses into 2012 if you can. Medical expenses are deductible only if they exceed 7.5 percent of adjusted gross income (AGI). This means if your AGI is $50,000, you can deduct only medical expenses over $3,750. Next year the threshold jumps to 10 percent of AGI.

Pay your January medical insurance premium in December to move this deduction to 2012. Any routine eye exams or dental visits should be moved up to December.

Also, paying with a credit card gives you the deduction this year and delays the actual payment until 2013.

What not to do

Rodgers warns that a common mistake is to wait and see what happens. It has not been uncommon for Congress to make significant changes to the tax code late in December, leaving taxpayers little time to react.

He advises a diversified approach to tax planning. Make a partial Roth conversion and harvest some capital gains, but don't wait until it's too late to do anything about rising taxes.

Rick Rodgers is president of Rodgers & Associates in Lancaster, Pa.

For more stories on investments and markets, please see HispanicBusiness' Finance Channel

Source: (c) 2012. All rights reserved.

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