Ways to avoid higher taxes

July 10, 2012 

After the election, President Obama will likely be a lame duck letting the Bush tax cuts expire or a newly empowered winner increasing taxes in 2013, predicts Andy Friedman a tax guru with the Washington Update. Not much legislation is expected before the presidential election.

Beware. Taxes, in my opinion, are probably going up: Top ordinary income tax rates, in fact, may increase from 35 percent to 44 percent. And, worse yet, the capital gains tax rate may conceivably increase from 15 percent to 24 percent. With Bush tax cuts likely expiring at the end of 2012, high net worth individuals in high tax brackets should consider strategies to lower taxes:

n Sell a business or reduce a concentrated stock portfolio. Take advantage of the low current 15 percent capital gain tax. Examine other non-tax factors before taking action.

n Look for tax efficient investments. Maximize contributions to 401K or IRAs.

n Consider selling some dividend paying stocks. Some financial professional recommend this strategy because the qualified dividend

tax rate may increase from 15 percent to 31 percent or higher, for many taxpayers in 2013. This shouldn't be the only reason to explore this option, though.

n Think about Roth IRA conversions. Since taxes will most likely be higher down the road, it may be advisable to convert traditional IRA to Roth IRAs. Future growth is all yours subject to meeting withdrawal requirements. As always, a conversion may not be appropriate for everyone so I recommend a personal independent review of your particular situation before making the decision.

n Use capital loss carryovers to offset capital gains. Capital loss carryovers will become even more valuable with 2013's expected additional 3.8 percent Medicare tax on investment income.

n Postpone some tax losses. If possible, ponder taking tax losses in a year when tax rates increase. Losses may become more valuable.

n Review with a financial adviser. Assess if you're properly positioned should these tax implications occur.

Not all strategies will apply to your situation. Seek qualified tax and financial advice. Changes to an investment strategy should never be based solely on tax considerations.

Jim Germer, a Bradenton CPA and financial advisor, can be reached at 941-746-5600 or email jim.germer@genworthrr.com.

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