While you may be focused on hunting holiday presents, this is the time of year when you need to be thinking about the April 15 income tax deadline. There are a number of things you can do before Dec. 31 to reduce the size of the check you have to write to Uncle Sam in April.
Adding to the urgency to spend time on money matters is the uncertainty created by the political showdown over the tax increases and spending cuts scheduled to kick in January 1 — the so-called fiscal cliff.
“It is hard to make any large scale tax planning recommendations because so much is unknown — tax rates, the future of tax deductions as with possible itemized deduction limits and even capital transactions as with capital gains tax rates,” says Mark Steber at Jackson Hewitt, a full-service, year-round income tax preparation company.
What action to take depends on your personal circumstances, experts say. But here are some steps to consider taking now in preparation for April 15 — and any tax changes Congress may cook up.
- Sell high. Selling stocks or mutual funds at a loss is a commonly used tactic to reduce taxable income. “Generally, a big part of tax planning is simply deferring payment of the tax,” says Lawrence Ploucha, a Fort Lauderdale, Florida tax attorney. “However, this approach may be wrong if taxes are expected to increase in the future, as they are now. So, accelerating the sale of assets that will produce capital gains into this year may be wise.” You’ll pay a 15 percent capital gains tax on your winners now, notes Kay Bell, tax analyst with BankRate.com. That tax rate may be much higher next year. And if you still like the long-term prospects of the stock you just sold, buy it back. That will also reset your cost basis when you sell years from now.
- Cash out. Ploucha also suggests that if you have the ability to control distribution of dividends -- say, from a small business you control -- or bonuses, have them paid this year.
- Be generous. If you’re wealthy, consider giving some of your riches away now, instead of waiting until you’re dead. The 2010 Tax Act allows the transfer of up to $5 million of assets to another individual free of all gift taxes, explains Alex Navarro, First Vice President & Private Financial Advisor, SunTrust Investment Services. The gift tax exemption is scheduled to return to its previous limit of $1 million in January 2013.
- Be generous II. The income tax deduction for charitable contributions may be on the chopping block, so give now. If you plan to donate cars, furniture or other property, don’t dally. “If you wait until the last minute, you may not have time to obtain any needed appraisals or valuations to list these contributions accurately as required by IRS guidelines,” says Kevin Gallegos, vice president of Phoenix operations for Freedom Financial Network.