Lowering Your Total Tax

If you expect to have a higher tax rate in the future, it helps to maximize taxes now. Two strategies that you may benefit from are converting your IRA and paying taxes on capital gains.

Convert from a Traditional to a Roth IRA

Converting from a Traditional IRA to a Roth IRA creates a taxable event. While you will pay a greater amount of taxes for the 2012 tax year, all future earnings and withdrawals will be tax free as long as you wait 5 years after the conversion and are 59 1/2 when you begin distributions. You will save because your higher tax rate will have no impact on future withdrawals.

Pay taxes on capital gains now

We recommend selling long term appreciated securities in 2012. These gains will be taxed at 0% for those in or below the 15% tax bracket and at 15% above. It is beneficial to do this in 2012 because next year long-term capital gains rates are increasing. In addition, in 2013 there will be a Medicare surtax of 3.8% on certain investment income. By paying capital gains taxes now, you will save in the future when you would have had to pay the gains at higher rates. You can also immediately buyback the shares you sell because wash-sale rules don’t apply to appreciated securities.

Medical expenses

Another strategy to utilize in 2012 – if you normally itemize medical expenses, accelerate payments due in 2013. Currently, medical expenses can only be deducted to the extent that they exceed 7.5% of AGI; however, in 2013 the threshold will increase to 10%. To put this in perspective, an individual with a $50,000 income will need increased medical expenses of $1,250 to deduct the same amount as 2012.