Tax Planning 2012: Strategies to Maximize Returns

By: RIA Content

Year-end tax planning is especially challenging this year because of uncertainty over whether Congress will enact sweeping tax reform that could have a major impact in 2012 and beyond. Even if there is no major tax legislation in the immediate future, Congress will eventually need to address several lingering issues such as whether to once again “patch” the alternative minimum tax, and what to do about the expiration of favorable estate and gift rules for estates of decedents dying, gifts made, or generation-skipping transfers made after December 31, 2012.

Until a decision is made on these and several other issues, your tax planning strategy needs to help you maximize your returns based upon the current laws. There are several viable options depending upon your financial situation.

One option that may be available to you is to realize losses on stock while substantially preserving your investment position. This can be done by selling the original holding, then buying back the same securities at least 31 days later. Alternatively, deferring capital losses into the future could be more beneficial as the losses could offset future higher-taxed income (assuming capital gain rates increase as most assume they will).

You may also want to consider accelerating long-term capital gains to lock in today’s lower capital gain rates (because, again, most experts assume capital gain rates wil climb). You can sell substantially appreciated investments in 2011 and immediately repurchase them at today’s higher cost basis. this locks in the current capital gains rate and reduces the amount to be taxed later.

By postponing income until 2012 and accelerating deductions into 2011 you may be able to claim larger deductions, credits, and other tax breaks for 2011 that are phased out over varying levels of adjusted gross income.

Another option you may want to consider is converting your traditional IRA into a Roth IRA. While this is not a current tax savings technique, as you will increase your 2011 income, a conversion to a Roth IRA will save taxes in the future as your initial investment and earnings come out tax free.

Additionally, if you expect to owe state and local income taxes when you file your return next year, consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end in order to deduct those taxes in 2011.

Also, if you become eligible to make health savings account contributions in December of this year, you can make a full year’s worth of deductible HSA contributions for 2012.

These are just a few tax-planning techniques; there are several options available. Tax law in complicated and a mistake could cost you a lot of money down the road. Contact your H&S advisor today to develop a strategy that will help maximize your returns this year and in the future.

For additional information, please contact your H&S Tax Advisor at 800-924-6891.