Reprinted with permission, www.fmsadvisors.com
Your Financial Planning To-Do List Before 2013
Are you gifting appreciated securities?If you have owned them for more than a year, you will be in line to take a deduction for 100% of their fair market value and avoid capital gains tax that would have resulted from simply selling the stock, fund or bond and then donating those proceeds. (Of course, if your investment is a loser, then it might be better to sell it and donate the money so you can claim a loss on the sale and deduct a charitable contribution equivalent to the proceeds.)1
Make a capital purchase. If you buy assets for your business that have a useful life of more than one year – a truck, a computer, furniture, a rototiller, whatever – those purchases are commonly characterized as capital expenses. For 2012, the Section 179 deduction can be as much as $139,000 (although it is ultimately limited to your net taxable business income). First-year bonus depreciation is set at 50% for most purchases of new equipment and software in 2012. The way it looks now, the 2013 deductions may be much less generous.2,4
Open an HSA. If you work for yourself or have a very small business, you may pay for your own health coverage. By establishing and funding a Health Savings Account in 2012, you could make fully deductible HSA contributions of up to $3,100 (singles) or $6,250 (married couples). Catch-up contributions are allowed if you are 50 or older.2
Practice tax loss harvesting. You could sell underperforming stocks in your portfolio – enough to rack up at least $3,000 in capital losses. If it ends up that your total capital losses top all of your capital gains in 2012, you can deduct up to $3,000 of capital losses from your 2012 ordinary income. If you have over $3,000 in capital losses, the excess rolls over into 2013.2
Pay attention to asset location. Here are two big reasons why tax efficiency should be a priority as 2012 leads into 2013: Next year, dividend income is slated to be taxed as regular income. So tax on qualified stock dividends could nearly triple for the wealthiest Americans.
Can you contribute the maximum to your IRA on January 1? The rationale behind this is that the sooner you make your contribution, the more interest those assets will earn. If you haven’t made your 2012 IRA contribution, you still have until April 15, 2013 to do that.6
Should you go Roth before 2013 gets here? We all know federal taxes are poised to rise next year, but one little detail isn’t getting enough publicity: the planned 3.8% Medicare surtax scheduled to hit single/joint filers with AGIs over $200,000/$250,000 will not apply to qualified payouts from Roth accounts.7
There are some other important areas to consider in 2013
Payroll taxes are slated to increase 2% next year. The payroll tax cut of 2011-12 has slim chance of extending into 2013. The maximum payroll tax paid by high earners is slated to be $7049.40 next year, $2,425 above 2012 levels. That isn’t just because Social Security taxes for employees are returning to the 6.2% level; it also reflects a 3.3% increase in the upper salary limit subject to the tax to $113,700.8
- You tend to pay a great deal of income tax each year.
- You tend to get a big federal tax refund each year.
- You recently married or divorced.
- A family member recently passed away.
- You have a new job at a much greater salary.
- You started a business venture or became self-employed.
Consider the tax impact of any 2012 transactions. Did you sell real property this year – or do you plan to before 2012 ends? Did you start a business? Are you thinking about exercising a stock option? Could any large commissions or bonuses come your way before January? Did you sell an investment held outside of a tax-deferred account? Any of this might significantly affect your 2012 taxes.
Would it be worth making a 13th mortgage payment this year? If your house is underwater, there’s no sense in doing it – and you could also argue that the dollars might be better off invested or put in your emergency fund. Those factors aside, however, there may be some merit to making a January mortgage payment in December. If you have a fixed-rate loan, a lump sum payment can reduce the principal and the total interest paid on it by that much more.
Are you marrying in 2013? If so, why not review the beneficiaries of your workplace retirement plan account, your IRA, and other assets? In light of your marriage, you may want to make changes to the relevant beneficiary forms. The same goes for your insurance coverage. If you will have a new last name in 2013, you will need a new Social Security card. Additionally, you and your spouse no doubt have individually particular retirement saving and investment strategies. Will they need to be revised or adjusted with marriage?
Are you coming home from active duty? If so, go ahead and check the status of your credit, and the state of any tax and legal proceedings that might have been preempted by your orders. Make sure your employee health insurance is still there, and revoke any power of attorney you may have granted to another person. Decide to focus on being healthy and wealthy in the New Year and consider talking with a financial and tax professional for a little additional wisdom.
Walid Petiri is a Registered Investment Advisor. His nearly two decades of financial experience covers virtually all areas of finance from tax, insurance, stockbroker, personal financial planning and personal banking to corporate credit, business planning and consumer lending. His career positions include MBNA America Bank, the Internal Revenue Service and American Express Financial Advisors, Inc.
Walid is a graduate of New Jersey’s Montclair State University with a degree in both business management and finance. Mr. Petiri is a recipient of the Accredited Asset Management Specialist designation from the College of Financial Planning in Denver, Colorado. He is also a Registered Financial Consultant and select member of the International Association of Registered Financial Consultants, an organization of professional financial advisors who are required to maintain a high standard of education, experience and integrity.