As the fiscal cliff deadline – December 31, 2012 – approaches, many things remain up in the air. Several outcomes are possible: continued standoff, ongoing delay, or bipartisan compromise.
Many observers expect the negotiations will likely result in Congress coming to an agreement on government spending cuts and modest increases in income taxes, in long-term capital gains taxes, and in qualified dividend taxes – although the timing remains unclear. In fact, Congress may take a multi-phased approach toward addressing the fiscal cliff: Some action in the near term and additional action in the months following.
But what’s an investor to do in the meantime? According to our Advisory Services Group, which comprises the firm’s top economic strategists, the wisest course for investors may also be a two-phased approach: Consider some actions before the end of 2012 and review your long-range plan next year as new legislation is enacted.
What You May Want to Do Now
Even without further details on what the final agreement will look like, your decisions now can help you position yourself for the future. For example, if you have appreciated securities or assets you’ve held for the long term, consider selling them in 2012, especially if you are able to take advantage of the 0% long-term capital gains rate. This may also be a move to consider if you hold a concentrated equity position or if you are selling property or a business. Otherwise, you could pay more tax in 2013.
If you are eligible to take an elective distribution from an annuity or an IRA in the near future, consider taking that distribution in 2012 rather than in 2013 or later to avoid paying income taxes at 2013’s potentially higher rate on the distributed funds. Or if you’re about to receive a bonus or a lump-sum payment, you might want to try to arrange for that to happen in the 2012 calendar year.
Actions You Might Want to Put Off Until 2013
Look at your gain and loss position. Maybe you had some modest, unrealized losses in 2012; if you don’t anticipate generating considerable capital gains in other areas in 2012 that need to be offset, you could benefit from waiting until 2013 to realize those losses, because offsetting long-term capital gains taxed at 20% (the proposed 2013 rate) will provide more tax savings than using the losses to offset gains taxed at 15% (the 2012 rate).
Think about your non-federal taxes. In some cases, you can delay paying the state and local taxes you owe in one year into the following year. Because those taxes may be deductible, the delayed payment and subsequent increase in tax deductions could result in potential tax savings in 2013, if tax rates do rise.
And consider your charitable contributions: Such deductions (if they’re not subject to limits based on your income) could be more valuable to you next year, meaning you may want to reduce your 2012 charitable contributions and allocate more contributions for 2013.
Time for a Talk
Any decisions about actions to take with your investments, income, and charitable giving should be done with an eye toward your overall investment plan and not in a vacuum.
Here are some questions you may want to discuss with your Financial Advisor and your tax advisor:
Do I have the right asset allocation in my portfolio?
When should I consider realizing my long-term gains?
When should I consider realizing capital losses?
When should I consider making a charitable contribution?
When should I consider exercising employer-granted stock options?
How should I take nonqualified 529 plan and Education Savings Account distributions?
Contact GellerRagans for information on how we can help you and your business.
Source: Wells Fargo Advisors