Tax-related moves to make in 2012

Regardless of who wins the current tax debate and who wins the upcoming elections, planning opportunities in 2012 will help you minimize both income taxes and estate taxes for the benefit of you and your heirs.

Key Points

Under current law, after 2012, long-term capital gains tax rates are scheduled to increase from 15% to 20%. The additional 3.8% Medicare tax also will be applied if you are married and your joint income exceeds $250,000 annually. This is in addition to the 0.9% surtax on earned income.


Similarly, if you intend to sell real estate (except for your principal residence where other rules apply), you may wish to sell during 2012 to minimize capital gains taxes. The new 3.8% surtax also applies to taxable interest, dividends, rent, some annuities, and royalties.

In addition to capital gains tax rates increasing, the top tax rate on wages is scheduled to reset to 39.6% from 35% starting in 2013. You might want to accelerate earned income in 2012 to avoid higher rates in 2013. Starting in 2013, the law (unless changed) will disallow the first 3% of your itemized deductions, including charitable gifts. You may wish, therefore, to accelerate such deductions in 2012 while watching out for the alternative minimum tax.


Now is also the time to consider whether making a Roth individual retirement account (IRA) conversion makes sense. Although doing so would result in your paying income taxes now, with higher tax rates in 2013 and beyond, biting the bullet may be wise. Once converted, as long as the funds remain in the Roth IRA for at least 5 years and until after you are age 59 ½, all of the growth will be tax-free (not tax-deferred, as with a regular IRA). You can have many years of tax-free income building within a Roth IRA.

Further, your tax-free Roth IRA is an excellent estate-planning vehicle because it can pass to your children or grandchildren and remain income tax-free throughout their lives, making this a multigenerational tax avoidance strategy. Unlike a regular IRA, a Roth IRA does not require that minimum distributions commence at age 70 ½. Essentially, you do not have to withdraw any amount of money throughout your lifetime. You can also make post-tax IRA contributions, regardless of your income, and then convert them into Roth IRA contributions to build up the tax-free aspect of your portfolio. Roth IRA income won't be subject to the 3.8% tax on net investment income that starts in 2013.

If you maintain a 401(k) plan, contribution limits increased in 2012. You can contribute $17,000 per calendar year and an additional $5,500 per calendar year if you are at least 50 years old in 2012.