Tax Hikes in 2013 Make Planning Important in 2012
With the tax season at an end, some taxpayers are already considering ways to lower taxes in the future. While it’s too late to change 2011 taxes, it’s the perfect time to make plans for actions in 2012.
As it stands now, when 2013 arrives, taxes are going up. The tax cuts created by President George W. Bush expire this year, and brackets return to the previous rates of up to 39.6 percent in 2013 from 35 percent now.
Taxpayers at all income levels will be affected. The 10 percent bracket disappears, and 15 percent becomes the lowest tax bracket. In addition, the child tax credit expires, and capital gains rates return to 20 percent from zero to 15 percent this year.
Continued Congressional gridlock and an unknown election outcome in November make it important to plan now to head off the potential tax hike. Some possible actions to consider are:
- Convert traditional IRAs to Roth IRAs. While this decision is based on each individual’s situation, those who are considering converting might want to act this year. Conversions are considered ordinary income, so they will be taxed at an individual’s current tax rate. For the wealthy, it would be better to be taxed at 35 percent instead of 39.6 percent.
- Take income earlier. If you are able to control when income is received, taking it in 2012 could result in it being taxed at a lower rate.
- Sell profitable investments. If the capital-gains tax is headed to 20 percent in 2013, some individuals might want to consider cashing in gains at 15 percent this year.
- Reduce dividends. If qualified dividends become taxed at the taxpayer’s tax rate in 2013 instead of zero to 15 percent now, some individuals might want to rebalance their portfolio to put investments that pay no or lower dividends in their taxable accounts and higher dividend investments in tax-deferred accounts.
On top of this, investment income would be taxed an additional 3.8 percent next year for those with incomes over $200,000 or $250,000 for married filing jointly. This includes interest, dividends, capital gains and rents. The tax is part of the health-care reform plan Continued Congressional to help the Medicare program.