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Taxes: Looking Ahead to 2012

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by Al Benelli, CFP, FIC

Taxes: Looking Ahead to 2012

Now that most of us have prepared our tax return for 2011, it may be important to understand that many items currently in the federal tax code are scheduled to expire after December 31, 2012. Although future actions to amend tax rules are anyone's guess, keeping abreast of developments in this area may be to your advantage. Consider the following when making decisions about your investments during 2012.

When taking capital gains, make them long term. Legislation passed by Congress in 2010 continues the 15% tax rate on long-term investment gains, those generated on investments held for more than one year, through December 31, 2012. In contrast, short-term capital gains on investments held for one year or less are taxed as ordinary income, where marginal tax rates currently can be as high as 35%.

Tax rates on qualified dividends are subject to change. Current tax rules maintain the 15% tax rate on qualified dividends through 12/31/2012. Although dividends are not guaranteed, an allocation to dividend-paying investments may provide an ongoing source of income that can cushion the ups and downs of capital gains and losses.

Accelerate activities that generate higher taxes. The top four federal income tax rates will be maintained at 25%, 28%, 33%, and 35% through the end of this year. If you are considering an activity that is likely to result in a bump in your income or a federal tax payment, you may want to complete it while the lower rates remain in effect. Examples could include converting to a Roth IRA and/or selling a business.

Escalate gifting strategies. Through December 31, 2012, estates valued at more than $5.12 million are subject to a federal estate tax rate of 35%. In addition, the tax code "unified" the estate tax and the gift tax, permitting an individual to gift $5.12 million between now and December 31, 2012, without triggering the federal gift tax

Capitalize on tax-advantaged accounts. By contributing regularly to an IRA, and keeping the money invested until qualified withdrawals are made, you can benefit from tax-free compounding. With a traditional IRA, qualified withdrawals after age 70½ are taxed as income. In certain instances, if investors adhere to income thresholds established by the Internal Revenue Service, contributions may be tax deductible.

Because estate and tax issues are complex and can be different from one individual to another, be sure to get tax and legal advice from a qualified tax professional and/or an attorney.  There may be additional items unique to your situation, but these tax suggestions may help you to make the most of your hard-earned dollars during 2012.




Tags: boomers money financial advise taxes tax planning

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