Income taxes are going up next year, as are capital gains and likely a host of other taxes. And they won't rise just for those earning more than $200,000 a year, warns Rick Rodgers, a financial planner from Lancaster, Pa.
"Taxes are likely to be higher for everyone," says Rodgers "We all know about the expiring Bush tax cuts, which may or may not be extended for everyone or just some. There are also new taxes that were part of the new Healthcare Reform Law, the expiring payroll tax cut; the alternative minimum tax that already expired in 2011, plus many other provisions that have expired or will expire at year end."
Prepare to pay more
Nearly everyone should prepare to pay more, adds the certified financial planner. But if there's good news, it's that you still have time to take advantage of 2012 tax rates – that may turn out to be the lowest we will see in some time, he contends.
To do that, consider his four tips to take advantage of this year's lower tax rates. Be forewarned: They must be implemented before year-end:
Roth conversion: No one knows for sure what'll happen to the tax code next year. That's why converting traditional IRAs to Roth IRAs is one of the best tax-planning strategies available.
It creates a taxable event in 2012. And, all future earnings in the account will be tax-free, as long as you wait five years and are age 59½ or older when you take withdrawals.
~~~PAGE_BREAK_HERE~~~The biggest advantage to Roth conversions is the ability to "undo" the transaction as late as Oct. 15, 2013. Should the new Congress pass a major tax reform bill next year that lowers tax rates across the board, you can put the money back into your IRA. It'll be like the transaction never happened, he explains.
Harvest capital gains: It's similar to harvesting losses. Sell appreciated securities that you've held for at least 12 months to realize the long-term gain for tax purposes.
You can immediately repurchase the same asset because there's no wash sale rule for realizing gains. This allows you to pay tax on the gain in 2012, when rates are low, and establish a new cost basis in the asset to minimize increased gains that may be taxed at higher rates. This strategy should appeal to anyone in the 15% tax bracket because capital gains are taxed at zero and may jump to 8 to 10% in 2013 if the tax cuts expire.
The strategy is also appealing to anyone subject to the Medicare surtax. If the current tax laws expire, the tax rate on long-term capital gains will jump from 15% to 23.8% – 21.8% for assets held more than five years.
Pay medical expenses: Anyone who normally itemizes medical expenses on their tax return should accelerate those expenses into 2012 if possible. Medical expenses are deductible only if they exceed 7½% of adjusted gross income.
So if your AGI is $50,000, you can deduct only medical expenses over $3,750. Next year, the threshold jumps to 10% of AGI. Pay your January medical insurance premium in December to move this deduction to 2012. Any routine eye exams or dental visits should be moved up to December. Paying with a credit card would give you the deduction this year and delay the actual payment until 2013.
Don't wait and see: Rodgers warns that it's a common mistake to wait and see what happens. It's not been uncommon for Congress to make significant changes to the tax code late in December, leaving taxpayers little time to do anything about rising taxes.
Take a proactive approach to tax planning now to cushion your fiscal cliff fall, urges this certified retirement counselor and president of Rodgers & Associates. A member of the National Association of Personal Financial Advisers, he's the author of The New Three-Legged Stool: A Tax Efficient Approach To Retirement Planning. For more details, visit www.RodgersSpeaks.com.