Taxes: Being Smart Amid Uncertain Times

Eve Kaplan

The tax guessing game continues because some proposed 2013 tax changes may – or may not --go into effect . Congress may keep us guessing until the end of this year but it’s clear overall taxes must and will increase.
Uncertainty is the enemy of planning, but here are the most items being “kicked around”:

1. Dividends will be taxed again at ordinary income tax rates after a long hiatus. Out goes the maximum 15% rates, in come ordinary income taxes. Wealthier Americans will pay more since the highest income tax rate is scheduled to rise from 35% to 39.6% in 2013.

2. Long-term capital gains rates will increase to a maximum 20% for most investors (10% for those who are in a 15% tax bracket or lower).

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3. The 3.8% Medicare surtax will be levied on income exceeding 250K (married filing jointly; 125K for married filing individually or 200K for an individual tax filer),

4. The federal estate tax exemption exclusion will drop to $1 million (opening many estate planning opportunities in 2012) and

5. The threshold for medical expense deductions in 2013 will increase from 7.5% of adjusted gross income (AGI) to 10% of AGI -- unless the taxpayer and his/her spouse turns 65 before the end of the taxable year through 2016.

Here are some strategies to consider for 2012 – bearing in mind the final outcome of tax changes is not yet know. Please note your specific situation may be different:

Dividends and Capital Gains Strategies:

• If you were planning to sell a highly appreciated investment in a taxable account anyway, it’s better to do it in 2012 than 2013. Selling before 12/31/12 locks in your 15% long-term capital gain; waiting until 2013 may cost you 20%.

• If you want to retain a specific mutual fund or stock, you can sell it in 2012 (maximum 15% capital gain) and repurchase it after 30 days to establish a higher basis. Example: you bought Apple shares in Jan 2010 for $211. Sell them now for $502, pay 15% capital gains tax (=$43.7 per share), and repurchase them for approx. $520. If you sell this position in 2013 for $600, your gain is $80; with a 20% capital gains tax, your taxes = $16 per share. Waiting to sell your position $600 in 2013 costs you more: your taxable gain ($389 per share) = 20% capital gains taxes of $77.8 per share. In this example, waiting to sell until 2013 with a low basis means you end up paying 30% more in taxes.

• On the other hand, consider postponing any sales if you have a large capital loss carryover on investments. Why? The offsetting loss carryover through end 2012 gives you a bigger ”bang for your buck” at higher tax rates.

• Do you have a highly appreciated investment you’d like to gift to family members in a low 10-15% tax bracket (e.g. your children or grandchildren who have little or no income)? If so, 2012 presents an opportunity to have them sell appreciated assets and avoid paying any federal income tax on the gain.

• If you’re retired, in a low 10-15% tax bracket, and can defer income (e.g. an IRA distribution) into the future, you pay 0% on qualified dividends and have no long-term capital gains tax through 12/31/12. Consider repositioning high dividend-earning investments in your taxable account to tax-deferred account – if possible – to lessen your tax burden.

Medical Expense Deductions:

• If you’re considering medical procedures (e.g. dental work) in 2012 or 2013, this year is a better year to do it if you itemize deductions and your unreimbursed medical expenses will exceed 7.5% of adjusted gross income. Proposed 2013 tax changes will not affect the 10% of adjusted gross income threshold for the AMT.

Other Possible Strategies:

• Some exposure to municipal bonds in after-tax accounts makes sense since your take-home yield may still exceed yields on taxable bonds or taxable bond funds. Municipalities may be forced to pay even higher interest rates to attract investors since Pres. Obama has prposed limiting the tax break for muni bond interest to 29% for couples earning more than 250K/year (single filers: 200K).

• Consider Roth conversions this year instead of 2013. Run numbers to make sure it’s prudent to do this since converted amounts bump up your taxable income.

• Seek out tax-managed mutual funds and funds with relatively low turnover – gains on securities held less than 1 year are taxed at your ordinary income tax rate. As always, hold high-returning assets with high tax penalties (REITs, junk bonds, commodities) in tax-deferred accounts.

Eve Kaplan(C) 2011

Eve Kaplan is a Fee-Only (no products sold) Certified Financial Planner® Practitioner with 30+ years of investment/planning experience. Kaplan Financial Advisors upholds the highest fiduciary standards in the planning industry.  Eve opened Kaplan Financial Advisors in 2004 to provide comprehensive financial planning and investment management services to single women and couples. Eve can be reached at 908-898-0549 or  Visit her website at


Copyright © 2011-2018 by Eve Kaplan

The opinions expressed herein are the writer's alone, and do not reflect the opinions of or anyone who works for is not responsible for the accuracy of any of the information supplied by the writer.

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