This article originally appeared as a column for the Cleveland Jewish News.
Automatic tax hikes. Entitlement cuts. Elimination of deductions. Closure of loopholes. Fiscal cliff. With all this fiscal uncertainly, it is difficult to know best to prepare for 2012 tax filings – and beyond.
You probably already are familiar with tax planning in regard to deductions. The bottom line is, you should make charitable donations to help offset other income such as capital gains. But did you know a donation doesn’t have to be money? It can also take the form of goods such as clothing, household items, motor vehicles, even real property. Consider strategic purchases for your home office or business. And if you have a business, you probably are already thinking about depreciation of business assets.
If you haven’t done so yet, a meeting with your financial adviser may be in order to determine if changes to your investment portfolio are warranted.
Tax rates on capital gains (profit made on the sale of certain assets, such as stocks) may increase significantly in 2013, and you may find it to your advantage to sell off certain investments before the calendar rolls over to take advantage of current rates, which may be lower. And, of course, selling assets that have lost value over the past year may help offset your capital gains.
Investors with dividend income may find such income taxed at a much higher rate for the 2013 tax year. You may want to review your investment portfolio and determine whether it is advantageous to shift assets accordingly. And, while we’re on the subject of income tax rates, income from municipal bonds is typically not subject to federal income tax, and may even be free from state and local tax.
You should also consider conventional wisdom regarding tax deferrals. Now is the last opportunity to maximize your contributions to a tax-deferred retirement plan like an individual retirement account, a SEP-IRA for the self-employed, or an employer-sponsored program such as a 401(k) or 403(b). If you have not already contributed the maximum annual allowable amount, which varies by your plan and age, trying to reach that magic number will help you defer a bit more of your tax liability (potentially dollar for dollar for the current tax year) as you save for your future.
Finally, you should revisit your estate plan. The estate and gift tax rates beyond 2012 are uncertain –and potentially much higher than current ones. Your financial and legal professionals can help you decide if it makes sense to transfer some assets to your heirs now to take advantage of today’s rates.
If all of this isn’t enough to ponder, your situation also must be viewed in light of your filing status. If you were divorced or married in 2012, you will either have fewer options for filing, or more.
With 2012 drawing to a close and the future of U.S. tax codes still uncertain, now is the ideal time to think – and talk to your tax, legal, and financial professionals – about how to maximize your savings for this tax year.
*Andrew Zashin writes about law for the Cleveland Jewish News. He is a co-managing partner with Zashin & Rich, with offices in Cleveland and Columbus.