So is this the year that Santa hauls the family cottage or part of the family-run restaurant down the chimney?
Wealthier parents and grandparents could be motivated to gift a substantial part of their estate now to take advantage of some favorable tax breaks that expire at the end of the year.
“The lifetime opportunity for making a transfer probably never will be greater than it is right now,” said Barbara Weltman, author of “J.K. Lasser’s 1,001 Deductions and Tax Breaks 2013.”
Congress won’t attack the tax-related overhang associated with the fiscal cliff until December or later. But individuals want to keep an eye on potential moves to consider before Dec. 31.
GIFT BEFORE THE CLIFF: Wealthy people may want to make gifts before the fiscal cliff. Estate taxes are on the fast track for going up substantially in 2013. Right now, taxpayers can avoid estate taxes if the house, the art collection, the private business, retirement savings and other valuables are worth up to $5.12 million. For a couple, that level can be doubled with planning. The estate tax is 35 percent.
If we go over the fiscal cliff, the threshold drops to $1 million come January, and the tax hits 55 percent, said Joseph DeGennaro, tax director for Doeren Mayhew in Troy, Mich.
Wealthier clients may want to consider whether now’s the time to make a large gift or transfer assets to heirs. Gifting does not work with money in an Individual Retirement Account or 401(k).
Some tax experts say a compromise could put the threshold at $3.5 million in 2013 and the top tax rate could be closer to 45 percent. Even so, now could be the time to talk to financial advisers.
CASH IN ON STOCKS: Cash in on capital gains by selling stock or other investments. Some investors may want to take advantage of lower capital-gains tax rates by selling profitable stocks before Dec. 31. Weltman said the idea is to sell now to reset the tax basis and avoid higher taxes on future appreciation. Now, a 0 percent rate exists on long-term capital gains for taxpayers in the bottom two brackets. Married taxpayers filing jointly pay 0 percent on capital gains with taxable income up to $70,700.
Others pay a 15 percent rate on long-term capital gains.
What will those rates be in 2013? Could be higher – especially for higher-income taxpayers.
Plus, higher-income families will see a new extra 3.8 percent tax in 2013, and that applies to some capital gains as well.
Weltman noted that investors can sell a stock at a gain and later buy that same stock at the new cost, if they wanted.
“Remember, the wash-sale rule doesn’t apply to gains,” she said. The wash-sale rule prevents taxpayers from taking a loss on a stock, if they sell the stock and then buy that same stock back within 30 days.
CONVERT AN IRA: If you have a large retirement nest egg, now could be the time to convert to a Roth IRA.
Converting from a traditional IRA to a Roth IRA is a tax-planning strategy to avoid paying higher income taxes in the future. Future earnings in the Roth account would be tax-free as long as you wait five years and are age 591/2 when you take money out of the Roth.
But the conversion itself triggers an initial tax hit, depending on how much pretax money you convert.
Mark Luscombe, CCH principal tax analyst, said a Roth conversion would make more sense to complete in 2012 than 2013 if tax rates increase, as expected next year.
Down the line, the Roth IRA could be a new strategy to avoid the 3.8 percent Medicare contribution tax that begins in 2013. The additional 3.8 percent tax applies to the lesser of your net investment income or your modified adjusted gross income that exceeds $200,000 for singles and $250,000 for joint-filers.
The Affordable Care Act of 2010 imposes the 3.8 percent Medicare contribution tax on unearned income of higher-income individuals in 2013.
Withdrawals from a regular IRA aren’t subject to that 3.8 percent tax, but Luscombe noted they are included in the modified adjusted gross income. Withdrawals from the Roth wouldn’t be included in the modified adjusted gross income.
Deciding to convert, though, would depend on how much longer you’d leave money in the Roth, anyway.
This new 3.8 percent tax could apply to someone who sells a second home, a vacation home, stock, or other investments next year.
ADJUST YOUR BUDGET: Get ready for a paycheck that’s slightly lighter. The word on the street is that the payroll tax holiday is on the way out the door. For 2011 and 2012, we saw a 2 percentage-point break hit paychecks regarding Social Security payroll taxes. Next year, the break is gone – unless Congress acts on this one. If you’re making $1,000 a week, this tax increase means that you’d have $20 less per week in your pocket in 2013.
Social Security taxes will apply to up to $113,700 of wages in 2013. The limit had been $110,000 of wages in 2012.
Susan Tompor is the personal finance columnist for the Detroit Free Press. She can be reached at stompor@freepress.com.
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