11 planning items to consider before December 31

December 6, 2012 by Beverly Schleper
Copeland Buhl

Year-end financial planning is always a relevant topic come December, but it is especially important to consider this year with the uncertainty relating to  numerous tax increases scheduled to go into effect on January 1st if Congress does not act to prevent them. Not only will individual tax rates go up, but many more individuals will be snared by the alternative minimum tax (AMT), and various deductions and other tax breaks will be unavailable.

These 11 items may help you save tax dollars if you act before year-end. Not all of them may apply to your particular situation, but you will likely benefit from many of them.


• Realize losses on stock this year while substantially preserving your investment position.  For example, sell the original holding, then buy back the same securities at least 31 days later. Be sure the time period between the sale and the repurchase is at least 31 days, or the loss will be disallowed under wash sale rules.

• If you are thinking of selling assets likely to yield large gains, try to make the sale before year-end. This year, long-term capital gains are taxed at a maximum rate of 15%, but depending on what happens in Congress, the rate could be higher next year. Also, if your adjusted gross income exceeds certain limits, gains taken next year may be exposed to the extra 3.8% tax on unearned income such as dividends, interest, and capital gains.

• What if you may own appreciated stock and you want to lock in a 15% tax rate on the gain, but you think the stock still has plenty of room to grow? In this situation, consider selling the stock and then repurchasing it. You’ll pay a maximum tax of 15% on the long-term gain. You also will wind up with a higher basis in the repurchased stock.


• Consider making contributions to a Roth IRA instead of a traditional IRA. Roth IRA payouts are tax-free as long as they are made (1) after a five-year period, and (2) on or after attaining age 59-1/2, after death or disability, or for a first-time home purchase.

• Convert traditional IRAs to Roth IRAs this year to avoid a possible hike in tax rates next year. Also, although a 2013 conversion won’t be hit by the 3.8% tax on unearned income, it could trigger that tax on your non-IRA gains, interest, and dividends.

• Take required minimum distributions (RMDs) from your IRA or employer-sponsored plan if you have reached age 70-1/2. Failure to take a required withdrawal can result in a penalty equal to 50% of the amount of the RMD not withdrawn. If you turn age 70-1/2 this year, you can delay the first required distribution to 2013, but if you do, you will have to take a double distribution in 2013—the amount required for 2012 plus the amount required for 2013. Think twice before delaying 2012 distributions to 2013—it might push you into a higher tax bracket or bring you above the modified AGI level that will trigger the extra 3.8% tax on unearned income. On the other hand, take both distributions in 2013 if you will be in a substantially lower tax bracket next year.

Health insurance and medical expenses

• During your employer’s open enrollment period, increase the amount you set aside for next year in your health flexible spending account (FSA) if you set aside too little for this year or if you expect to incur substantial medical expenses next year. Keep in mind that beginning next year, the maximum contribution to a health FSA will be $2,500. Don’t forget that you can no longer set aside amounts to get tax-free reimbursements for over-the-counter drugs.

• If you became eligible to make health savings account (HSA) contributions this year, you can make a full year’s worth of deductible HSA contributions even if you were not enrolled in an eligible plan for the entire year.

• This year, unreimbursed medical expenses are deductible to the extent they exceed 7.5% of your AGI, but in 2013, for individuals under age 65, these expenses will be deductible only to the extent they exceed 10% of AGI. If you have a shot at exceeding the 7.5% floor this year, accelerate into this year “discretionary” medical expenses you were planning on making next year to take full advantage of the lower deduction threshold. 


State taxes

• If you expect to owe state income taxes when you file your return, consider increasing withholding of state taxes (or make estimated tax payments) before year-end to pull the deduction into 2012.


• Make gifts sheltered by the annual gift tax exclusion before the end of the year, thereby saving future gift and estate taxes. You can give $13,000 in 2012 to each of an unlimited number of individuals, or $26,000 if your spouse consents. The transfers also may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax. Savings for next year could be even greater if tax rates increase.


Remember to give us a call before you move forward with any of these or other year-end tax-planning strategies. We can help you navigate complex regulations to ensure that your actions produce the desired result.