As the end of the year approaches, financial and tax planning remains complex. With the close November election and the continuation of divided government, prospects for comprehensive tax reform, and even more limited legislation before the end of 2012, remain unclear. Even in an uncertain economy and with the prospect of increased taxes due to the so-called “fiscal cliff” approaching in early 2013, opportunities for income and estate planning remain plentiful.
You should use these last few weeks of 2012 to review your financial picture. Listed below are 10 strategies to consider before the end of 2012. Some of these suggestions are tried and true and others apply to 2012 only. As with all tax strategies, it is essential to engage a tax professional before taking final action.
1. Donate appreciated securities to pay pledges and gifts to Federation and other charities. You avoid the capital gains tax and maximize your contribution. Make payment before the end of December.
2. Open a Philanthropic Fund with Federation before the end of the year. You can use this donor-advised fund as your personal philanthropic account to recommend charitable gifts in future years and receive an income tax deduction in 2012.
3. Make large gifts to family members in 2012 while the lifetime aggregate Federal gift tax exemption remains at $5.12 million. This exemption is likely to be lower in the future, so take advantage in 2012.
4. Sell appreciated assets (owned for more than one year) in 2012 while the capital gains tax rate is still low. Capital gains rates are likely to be much higher in future years.
5. Pay long-term charitable pledges in 2012. There may be a cap on charitable deductions in future years.
6. Remember to make your required minimum distribution (RMD) from your IRA or retirement plan if older than 701⁄2 before the end of the year. Unfortunately, as this is being written, the IRA charitable rollover is still not available for 2012.
7. Accelerate income by exercising stock options and receiving bonuses in 2012. Income tax rates in 2013 are expected to be higher, and there are new additional taxes in 2013 on “high-income taxpayers” — adjusted gross income in excess of $200,000 (single) and $250,000 (married) — to help pay for the Affordable Care Act (“ObamaCare”). The Alternative Minimum Tax will also be an issue for more taxpayers in 2013 if Congress does not act.
8. Reassess your estate plan and meet with your attorney before the end of the year. Estate taxes may be much higher in 2013. Planning techniques to consider that take advantage of historically low interest rates include charitable lead trusts, grantor retained annuity trusts and intrafamily loans.
9. Remember to use up all of your 2012 Flexible Spending Arrangement (FSA) account before the end of the year.
10. Pay January 2013 deductible expenses before the end of the year in order to maximize your deductions.
Remember to meet with your tax or financial adviser before utilizing any of the information presented above. Your personal financial situation may require a different response than suggested in this article.
If you have questions or need further information, call or contact Rachel Gross, director of Planned Giving and Endowments, Jewish Federation of Greater Philadelphia, at 215-832-0572 or [email protected] .
Steven Woolf serves as Senior Tax Policy Counsel, Jewish Federations of North America. Chris Morton is the director of the Jewish Community Foundation of the Jewish Federation of Las Vegas.