2012 tax planning and the "fiscal cliff"

Tax Form and Money iStockphoto

(MoneyWatch) There are only a few weeks remaining in 2012. But that's enough time to make a few moves that could help you pay less combined taxes for this year and the next.

Basic year-end income tax planning focuses on two considerations: Should income be accelerated into 2012 or deferred into 2013 and, should deductions and credits be claimed in 2012 or deferred and claimed in 2013?

If tax rates and rules for 2013 were known, this would be fairly straight forward. The problem is that this year it's more challenging to do this because no one really knows what the tax laws will be in 2013.

Even with all of the uncertainty surrounding the so-called "fiscal cliff," I think it's a safe bet that the outcome will be either higher tax rates for all or higher tax rates for some. This means that folks whose income in 2013 is in the $250,000 range or up can count on higher taxes in 2013. With that in mind, here are a few basic tax planning moves to think about:

Realize income in 2012

If you own or are employed by a small business and you typically receive a bonus in January, consider having some or all of next years bonus income paid to you in 2012. Doing this may also save on additional Social Security taxes that apply in 2013 on income above certain thresholds.

Also, if you own a small business and collect customer billings, consider asking your customers to pay you before year-end so that you can realize the income in 2012.

Realized capital gains on investments you sell are likely to be taxed at a higher rate in 2013. For this reason it seems to make sense to sell some investments and realize some gains before the end of the year. Of course, this only makes sense to do for investments you were going to sell anyway and in taxable accounts. Also, if you are trying to game the changing tax rates, and plan to immediately buy the position back, you can do so because the wash sale rules only apply to selling positions where a loss is realized.

One part of the tax law that seems to be certain is the higher taxes that are a part of the new health care reform laws. Starting in 2013, a new 3.8 percent Medicare tax will apply to unearned income, including interest, dividends and capital gains. So cashing in some dividend paying stocks, bonds with high interest rates and investments with unrealized gains in 2012 might make sense in some situations because this type of income in 2012 will not be subject to the additional tax.

People who are considering a Roth IRA conversion may want complete the conversion before the end of the year. The amount of the IRA that is converted is taxable as income, and doing a conversion this a year if your 2013 tax bracket is due to rise may result in some significant tax savings.

People over age 70.5 who take required minimum distributions from their retirement accounts may want to consider taxing a larger distribution in 2012, if they think their tax rate will be higher in 2013.

Check back later this week when I'll write about additional year-end tax planning as it relates to planning your tax deductions and credits.

  • Ray Martin

    View all articles by Ray Martin on CBS MoneyWatch»
    Ray Martin has been a practicing financial advisor since 1986, providing financial guidance and advice to individuals. He has appeared regularly as a contributor on the CBS Early Show, CBS NewsPath, as a columnist on CBS Moneywatch.com and on NBC-TV's morning newscast TODAY. He has also appeared on the Oprah Winfrey Show and is the author of two books.

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