Blog - 2013 Taxes: The Setting Sun Part 2


Jessica Smith
Vice President
Director of Financial Planning

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In last month’s blog, Mitch Marsden discussed the major tax changes that are set to occur next year under current law. In this month’s post, I’d like to continue that thought, but focus on three tax planning strategies to help you minimize the effect.

1.      Planning for Deductions

If you file itemized deductions, own a business, or are involved in other active investment activities, it may behoove you to spend some time reviewing the rest of your 2012 deductions before the end of the year. We know that the 2012 tax rates are lower than next year’s rates are currently written to be, so unless you have an abnormally high tax year in 2012, it makes sense to evaluate postponing some deductible expenses to 2013, if possible.

For example, if you have been thinking about giving a large donation to a local charity or your church for a special project, consider whether you can postpone that donation to 2013.  Based on current law, this could result in larger tax savings for each dollar of contribution.

2.      Capital Gain/Loss Harvesting

For many years, you would hear financial advisors, including us, talk about harvesting capital losses, but now, I urge you to think about harvesting capital gains. What do I mean?

Capital gains tax is a tax on the growth of an asset. If the asset is held less than one year, it is considered a short term capital gain and taxed the same as all of your other ordinary income; if the asset is held longer than one year, it is considered a long term gain, and taxed at a preferential rate. Before 2001, long term capital gain rates were 28%, and since then, through several legislation changes, rates have dropped to 15% for those in the higher ordinary tax brackets and 0% for those in the lowest two tax brackets. Next year, however, these rates are set to increase to 20% and 10%, respectively.

In the past, we have reviewed your accounts to determine if it makes sense to take advantage of capital losses in your portfolio to help offset other capital gains and up to $3,000 in ordinary income. This year, however, we will evaluate your portfolio to see if it makes sense to recognize some capital gain this year so that you can take advantage of the lower rates. As an example, if you recognize $10,000 in capital gains this year and you are in the 15% capital gain bracket, you will pay $1,500 in taxes. If you were to recognize the same gain in 2013, it would cost you $2,000 in taxes. So, you could save $500 just by recognizing the gain this year instead of next. Now, imagine if you are in the 0% capital gain tax rate this year. The tax savings become huge as you could save the full $2,000!

However, if you already have large carryforward losses from previous years, this tactic may not work as well. Instead, we may look at ways to save this loss or increase it by recognizing more capital losses in 2012. This strategy would give you a large carryforward loss to help offset the 2013 income.

3.      Realization of Ordinary Income

Lastly, 2012 may be a great year to complete a Roth conversion, exercise stock options, or recognize an end of year bonus. As Mitch mentioned in last month’s blog, under 2013 law, tax rates will increase for virtually everyone. So whether you are in the 15% bracket or the 35% bracket, you could benefit from simply taking a minute to think about your potential income sources and what control you have over them. You may save 3-5% in taxes by pulling income into 2012.

As a reminder, here is a chart that shows how tax rates are set to change for each tax bracket in 2013:

2012 Rates

Corresponding Rate in 2013

10%

15%

15%

15%

25%

28%

28%

31%

33%

36%

35%

39.6%

No one likes to write a check to the IRS, but doing so in 2012 may actually save you money. Let us know if you would like to talk further about how some of the strategies above may apply to your situation.  Keep in mind that some may not apply to you at all, or may even be damaging based on your particular circumstances. In addition, the law is always subject to change and could nullify or void these strategies. We highly encourage you to consult with us and/or your tax advisors before acting.

Circular 230 Disclosure: The information and discussion contained in this post is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed on you as a US taxpayer. You are advised to seek individual advice based on your particular circumstances from your tax advisor(s).


Disclaimer

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Longview Financial Advisors, Inc.), or any non-investment related content, made reference to directly or indirectly in this newsletter or post will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter or post serves as the receipt of, or as a substitute for, personalized investment advice from Longview Financial Advisors, Inc.. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Longview Financial Advisors, Inc. is neither a law firm nor a certified public accounting firm and no portion of the newsletter or post content should be construed as legal or accounting advice. A copy of the Longview Financial Advisors, Inc.’s current written disclosure statement discussing our advisory services and fees is available for review upon request.

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