Tax Tips for the End of the Year
December 16, 2012 -- Fiscal cliff or not, Congress has a history of making significant changes to the tax code late in December. That means taxpayers have very little time to figure out how it affects them.
We brought in Joan Jensen, president and CEO of the Central Credit Union of Illinois (www.centralcu.org/), to share tips on what you should do to plan for a possible tax rate increase.
1. Take the Money and Run (Till 2013)
Cash out your winnings if you have held securities for at least 12 months that are not in tax advantaged retirement type accounts, so you can realize the long-term gains while capital gains taxes remain low. You can immediately repurchase the same asset because there is no wash sale rule for realizing gains. Also, the repurchase will establish a new cost basis for the asset, potentially minimizing increased gains that could potentially be taxed at higher rates if/ when a tax increase occurs.
2. Convert IRAs to Roth IRAs
Higher income taxpayers may want to consider converting pre-tax accounts to Roth accounts this year. This would allow you to convert all or part of any traditional IRA account and pay taxes at today's rates rather than at possibly higher rates in 2013 - and beyond. You can reverse all or part of the transaction as late as Oct. 15, 2013.
3. Don't Exceed the Match on pre-tax 401(k) Contributions
Wait until 2013 to start maximizing pre-tax 401(k) contributions again. You could switch to making Roth 401(k) contributions if your employer offers the option. Or, after you max out your match, set up your own Roth IRA.
4. Delay Charitable Contributions (until January)
Many people make the majority of their charitable contributions in December. With the prospect of increased tax rates, these deductions may be more valuable to you in January, if taxes go up.
5. Consult a Professional before Year End
Hire a tax professional or wealth manager who will consider your individual circumstances and counsel you on the best way to take advantage of current tax laws. In addition to income tax planning you should also examine your estate planning. The current laws are set to expire at year end and changes could be significant for some estates.
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