Year-End Tax Planning Moves for Individuals

One of the most important new issues impacting year-end tax planning is the 3.8% Medicare surtax on unearned income for higher income individuals.  This surtax is effective as of January 1, 2013 and is imposed on a taxpayer’s net investment income.  This income includes capital gains from the disposition of investment property.

In addition, unless Congress acts soon, capital gains and dividends tax rates will increase beginning in 2013.  Accordingly, by accelerating capital gains into 2012, you are assured of a maximum capital gains rate of 15% for federal tax purposes. Since the Medicare surtax does not apply until 2013, you will need to make some important decisions now as to whether to accelerate capital gains.  Assuming tax rates on long-term capital gains increase to 20%, the actual rate for taxpayers with AGI in excess of $250,000 for joint filers ($200,000 single) will be paying federal taxes at a rate of 23.8% vs. the current 15% rate. 

You may want to consider converting your traditional IRA into a Roth IRA.  We are down to the last month before tax rates will in all likelihood increase.  For that reason, we would suggest you consider converting some or all of your traditional IRA before 2013.  Not only will your tax rates probably be higher in the future, but waiting until 2013 or later to convert could cause you to incur the 3.8% surtax on your unearned income. 

Converting now locks in your taxes at a lower rate and all future growth in your Roth IRA will be tax free.  In addition, you are not required to take minimum distributions out of a Roth IRA upon reaching age 70 ½ (so it can continue to grow tax free).  Finally, should you convert all of your traditional IRAs, you will be eligible for contributing to Roth IRAs in the future.

Please contact our office at 802.878.1963 or email [email protected] if you want to know how the new rates could impact your tax planning for 2012 and 2013.