Dec
The fiscal cliff that we all keep hearing so much about refers to a series of law changes which could result in tax increases and spending cuts. There are many tax laws currently on the books which are set to expire on December 31st of this year. As most of you know the government is currently working to try to avoid this cliff but as of the date of this article they have not reached any agreements. While it is possible that new tax legislation may be adopted before yearend, it is also possible that the laws may be written in 2013 and applied retroactively to January 1st of 2013 or that the Bush tax cuts are extended for another year. In other words nobody really knows.
With all of this uncertainty, is there anything I can do to prepare?
Currently joint filers with taxable income (including any capital gains) of $70,700 or less ($35,350 for single or married filing separately) have a capital gains tax rate of 0%. One strategy that may be implemented is to sell appreciated stock, recognize the gain and pay no taxes if you are below these limits. If you like the stock you can buy it back and would now have a higher basis when you sell the stock somewhere down the line. For example, if you had a stock with a $2,000 basis and a fair market value of $10,000 you could sell it recognize the $8,000 profit and pay no tax (assuming you are under the aforementioned thresholds) and buy it back for $10,000. Now when you sell the stock in the future your basis would be $10,000 instead of $2,000.
In a situation where you have capital gain property and are in excess of the limits outlined above you may still want to sell the property in 2012 while the capital gains rate is 15%. In 2013 the capital gain rate will be 20% and there is also an additional 3.8% Medicare tax on investment income for individuals with Adjusted Gross Income (AGI) in excess of $200,000 ($250,000 for married individuals filing jointly).
If you have an “S” corporation with retained earnings from before the corporation became an “S” corp, then distribute it to the shareholders before the end of 2012. This will allow the shareholders to pay tax at the current 15% rate.
You may want to see if you can prepay any medical expenses in 2012. In 2012 you are allowed a medical deduction for any expense in excess of 7.5% of your AGI. In 2013 the threshold becomes 10%.
Wealthy individuals trying to reduce their estates may want to make gifts before the end of 2012. Currently the lifetime gift limit is $5,120,000. This figure falls to $1,000,000 (if no changes are made) in 2013.
Conclusion
This article suggests a couple of strategies to possibly adopt before yearend. As always I strongly urge that you consult a tax professional when doing any tax planning.