I trust you had a wonderful Thanksgiving holiday, that you didn’t get trampled on Black Friday and that you worked on your cyber stocking on Cyber Monday. We enjoyed Thanksgiving Day with our nuclear family, including our daughter in from college, Saturday with my extended family and Sunday with my wife’s extended family. Time with family and the fellowship were awesome. At the office, we’ve bought some new furniture and wall art to give us a new look. We bought everything online, saving money and time. Isn’t technology great? Please come by and check out our new look when you get a chance.
As we round the corner towards the end of this “fiscal cliff” year, I wanted to remind you of the numerous tax planning opportunities available to you. The most obvious is contributing to your company retirement plan such as a 401k or 403b. Employee contributions limits of $17,000 (or $22,500 for those over age 50) are tax deductible so, depending on your tax bracket, upwards of 25% of every $1 contributed is a gift from Uncle Sam. Company matches make the deal all the sweeter. If you are self employed, a SEP or SIMPLE IRA works the same way. Contribution limits on a SEP are limited to 20% of adjusted gross income and $11,500 with a SIMPLE ($17,000 if over 50.) There are customizable retirement plans available to those willing and able to save more. Let us help you set something up and get the savings started.
Retirement plans are the best tax reduction tool available for the longer term and it will also set you up for a great retirement lifestyle. Regular contributions (dollar cost averaging) into a diversified portfolio of stock, bond and “alternative” funds, regardless of the current economic sentiment coupled with the miracle of compound interest, is the best way to grow the funds necessary to pay for the retirement of your dreams.
If you don’t have a company retirement plan or even if you do within certain income limits, contributions to a traditional IRA are tax deductible as well. You can contribute up to $5,000 ($6,000 if over age 50) and have until April 15, 2013 to make your 2012 contribution. Even if the IRA contribution is not tax deductible, growth in the account is tax deferred so is a great tool to grow your retirement nest egg. And if the IRA is not tax deductible, contribute to a ROTH IRA and the account will grow tax free forever. There are qualifications rules around ROTH contributions so give us a call if you are interested in getting this going.
For high income earners that don’t qualify to contribute to a Roth IRA, you can still contribute to a traditional IRA and then immediately convert it to a Roth and benefit from tax free growth. Even if your budget doesn’t allow for an IRA contribution this year, but you have savings from years past, you can contribute to your IRA out of savings. It doesn’t have to come from earnings directly.
Charitable gifts are another way to help in both reducing income taxes and possibly estate taxes. Within reason, gifts to charitable organizations are tax deductible against earned income. Gifts of property are deductible at stated value, but appraised value is recommended for gifts above $10,000.
By now, if you have a TV you are well aware of the looming “fiscal cliff”, the tax increases and government spending cuts set to go into effect on January 1. What is not being covered by the popular press is the strong growth that is likely to result from the fiscal restraint and smaller deficits. While these changes would indeed likely push the economy into a shallow recession next year, the independent Congressional Budget Office projects accelerating growth in 2014 and beyond along with dramatically reduced deficits. This is not the draconian situation the press has been peddling. Rather, it is a recipe for better days ahead.
If Congress fails to act, the federal estate tax exclusion is set to revert back to $1.0 million per person from the current $5.0 million. I do think Congress will ultimately come to an agreement, but who knows with all of the crazy year-end posturing going on. The lifetime gift exclusion this year is also $5 million, but on January 1 goes back to $1.0 million. So if you are in a position to make a sizable gift to loved ones, to charity or a trust and want to improve your taxable estate situation, time is of the essence. Annual gifts of $13,000 per individual or $26,000 for a married couple are an excellent tool to help out your loved ones and move money out of your estate.
The so-called Bush era tax cuts are set to expire at year end, raising marginal income tax rates across the board, increasing long term capital gains to 20% from 15%, eliminating favorable tax treatment of qualified dividends. As well, a host of other tax increases are pending including an increase in the Alternative Minimum Tax calculation and a 3.8% Medicare surtax on income above $250,000 to help fund so-called Obama Care. For perspective however, the top marginal tax bracket would rise from 35% to 39.6%, which still compares very favorably to the 50% top marginal tax rate in the early ‘80’s, 70% in the ‘70’s and fully 90% during the 1950’s.
If you have the ability to accelerate income into 2012 or defer business expenses into 2013, that might make sense at the margin. Or if you expect to sell some assets in 2013 to fund purchases, it can make sense to sell the holdings this year to lock in the 15% capital gains rate and avoid the 3.8% surtax. I’m not a fan of selling out of fear of taxes rising. The market does a remarkable job of discounting the full set of possible outlooks and it is hard to beat Mr. Market at its own game. But, if you expect to sell in 2013, then selling early should definitely be a consideration.
Last, but not least is taking any short and long term losses against gains, thus lowering the tax bite. We’ve had a good year in the market so losses are minimal, but we’ll review your portfolio, see what we can do and do what we can. Importantly, if we don’t have your 2011 tax return, please send it to us. If you have tax-loss carryovers on the books, those will inform our year end gain and loss harvesting strategies.