Reading personal finance web sites is always funny this time of year. The end of the year is filled with articles about how to save money on taxes in the current year... 2012. Unfortunately for those recycled articles ("ain't nothing changed 'cept the date!") that isn't such a great idea this next year. So here goes - things that I have been employing over the last month. Feel free to steal my ideas or tell me I'm wasting money, but enjoy either way!
Increasing Taxes? Blasphemy!
That's right, dear reader - your taxes are going up. Even if you think you're protected from the various points we've made about dividends and capital gains and tax rates, you aren't immune from changes in the payroll tax - it's going up 2 percentage points on January first. Additionally, you aren't shielded from increases in the medical deduction - in 2013, you can deduct medical expenses if you cross 7.5% of your adjusted gross income, or 10% if you are subject to the alternative minimum tax. In 2013? It goes to 10%.
Odds are, the majority of readers won't end up being affected by income tax changes, even if we do go over the "Fiscal Cliff". Regardless, here's a few things you can do now that help everyone:
- Accept as Much Income This Year as Possible. Obviously, this applies even more if you're a high earner, but everyone subject to the payroll tax needs to do what they can as well.
- Push as Many Deductions to Next Year as Possible. Charities? Property taxes which can be paid in 2012 or 2013? Anything you can think to deduct next year, think about it. This could backfire, so make sure you hedge your bets - it's possible there will be deduction caps next year which make it impossible to take as large a deduction. Personally, I'm risking it and moving a whole bunch of payments into January.
- Tax Gain Harvesting. If you've been investing for a while, you probably know what tax loss harvesting is - selling losses near the end of the year to offset gains. Well, save your losses for next year's tax return, and instead think about selling your winners in taxable accounts. Unlike with losers you don't have to worry about 'wash sales', where you can't come back into a stock within 30 days. You can sell and re-buy to reset your tax basis - you might as well pay the tax now with the lower capital gain rate.
Think Twice When You See Recycled Content
Sorry I'm posting this so late, but starting today you can do something about it. This 2012-2013 transition is going to increase taxes on everyone, regardless of the outcome of the fiscal cliff.
So, yeah, I'm hedging a bit since we don't have clarity on whether there will be a so-called 'grand bargain'. Since Mitt Romney's plan was buttressed at least in part by a deduction cap (and once it's in the public consciousness it will likely be taken as a part of a compromise), moving deductions around will be in vain - especially if the cap is on the lower end, around $17,000 to $25,000 (two numbers I've heard tossed around). Regardless, I'm trying to earn as much income as possible now and save as many deductions as possible for later.
And if you don't itemize? Ha... consider yourselves lucky... this time.
