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Year-End Tax Planning

November 6, 2012

At this point, we have no idea of what the 2013 tax rates will be, but that should not stop us from doing some sound planning to reduce taxes for 2012.  Here are a few things you can do.


  • All planning starts with a projection.  Prepare one now to see where you stand if nothing is done
  • If you will be subject to the Alternative Minimum Tax, try to take some steps to either get out of it or take advantage of it.  If in it, don’t pay any more state or real estate taxes which will not give you a benefit.  Try to pay beginning of January if possible.  If you cannot avoid the AMT, consider accelerating income that will be taxed at the lower AMT bracket such as cashing in U.S. Savings Bonds, or accelerating the payment of income you will receive in January
  • If you are eligible for traditional or Roth IRA contributions, consider making the contribution sooner rather than later to start the tax-deferred or tax-free income stream
  • If you have a business or receive income subject to self-employment tax, consider opening a 401k or Keogh account on or before December 31, 2012, or a SEP (which can be opened as late as the due date (including extensions) for your 2012 tax return. Contributions to all three plans do not have to be made until sometime in 2013 (check with tax advisor for the      dates)
  • Consider a pre-year end Roth IRA conversion that will be taxed at 2012 rates
  • Accelerate as many deductions as possible to get the benefit this year rather than next year.  True, next year’s rates will probably be higher, but we don’t know how the tax structure will be constituted and the sooner you can save tax… the better.  One effective way is to donate appreciated stock to a charity or donor-advised fund.  You will get a deduction for the full value of the stock and not have to recognize the income
  • If you own a corporation with retained earnings, consider paying a pre-December 31 dividend that will be taxed at the 15% federal rate.
  • If you own appreciated stock that you are contemplating selling next year, perhaps selling it now to lock in the 15% rate would be in order.  If you are not sure you want to sell it, but assume it will be sold at some time in the near future, selling it and immediately buying it back would also lock in the 15% rate.  This is a novel “tax planning” technique – selling stock to pay the tax sooner!
  • You can make a gift of appreciated stock to people you are supporting that are in a “0” tax bracket for capital gains, and have them sell the stock immediately, thereby, avoiding any tax.  Note that you cannot do this with people subject to the kiddie tax
  • If you own stock with losses, you can sell them to realize the loss.  If you buy them back within 30 days (before or after the sale), you will have a “wash sale” and cannot deduct the loss.  A suggestion is to sell and then buy (immediately) an ETF that is similar to the stocks you sell.  This will provide a similar market risk. After the 30-day period, you can reverse the transactions.  An example is to sell individual healthcare stocks, and buy a healthcare ETF.
  • If you have realized short-term gains, try to sell stocks with losses to shelter them.  The best is to sell stock with long term losses.  This will net out and these losses won’t offset long term gains in a later year
  • If you own mutual funds that will declare year-end capital gain dividends without making an offsetting distribution, consider selling them now!
  • If you want to pass some wealth to others that will be subject someday to estate taxes if retained by you, tax-free gifts of $13,000 per person can be made up until December 31.  The $13,000 is doubled if you have a consenting spouse.  There is no income tax benefit to this, but it will remove this money and any future earnings and appreciation from your eventual estate
  • If you were required to make estimated tax payments and did not, you should consider taking an IRA distribution and having the funds applied to withholding tax.  If you do not want to treat this as a taxable distribution, repay the gross amount to the IRA within 60 days designating it as a tax-free rollover
  • Owners of businesses with more than $1 million profits should consider a Captive Insurance Company deduction under IRC§ 831(b)


The above are suggestions you can consider.  Before you do anything, meet with your tax advisor to make sure the planning is effective for your situation.

2 Comments leave one →
  1. 6hawthorne permalink
    November 6, 2012 6:48 pm

    Hi Ed You send some very important information .Thank Bob Nagler

  2. November 7, 2012 3:16 pm

    Thanks for the comment.

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