We have been getting a lot of questions from readers about what we think will happen with the tax system in the lame-duck sessions after the November elections. Who's most at risk of higher tax rates? What will happen if the Bush tax cuts expire? Are the tax rates on capital gains and dividends going to increase next year? Should you sell appreciated assets now?
To help provide perspective on these issues and more, Kiplinger tax experts Kevin McCormally and Sandra Block will take your questions Thursday, October 11, from 2pm to 3pm ET. Submit questions early by clicking "make comment now."
We hope you'll join us!
Please feel free to submit your questions early. We'll get started around 2pm ET.
Welcome to today’s live chat about tax planning in face of the fiscal cliff!
We have two Kiplinger tax experts with us today, editorial director Kevin McCormally and senior associate editor Sandra Block.
Thanks for joining us, Kevin and Sandra.
Happy to be here. Let the questions begin.
Alright. Here's one for you, Kevin. Just what is this fiscal cliff everyone is worried about and why does it affect year-end tax planning?
The fiscal cliff is the impending perfect storm of tax increases and automatic spending cuts scheduled to arrive with the new year on January 1. Most of the threatened tax hikes will come as a result of the expiration of the Bush tax cuts and the spending cuts -- $1.2 trillion over ten years – are the result of last year’s debt-ceiling deal that was supposed to light a fire under Congress to pass serious deficit reduction legislation.
Because the lawmakers couldn’t manage that, the sword of Damocles they hung over their necks -- automatic, across the board spending cuts -- will fall on January 1. The Congressional Budget Office says that if we fall off the fiscal cliff, the combination of tax hikes and budget cuts would result in a significant recession and the loss of about 2 million jobs. There’s still a chance that Congress will do something it the lame duck session after the election to avoid falling off the cliff . . . but it’s far from certain.
Why does it matter for year-end tax planning? Because the real goal isn’t just to hold down your 2012 tax bill, but to hold down what you’ll owe in 2012 and 2013 combined. And, if you don’t know what the rules will really be in 2013, it’s really hard to plan.
Lots of good information there. Thanks, Kevin.
So, more than anything, it's important for folks to educate themselves about what could happen.
Sandra, I know you have a piece in the magazine that goes to press this weekend about year-end planning. How about a preview of one of the tips you offer? Do any of them relate to the fiscal cliff?
One of the things we're recommending is to consider converting your traditional IRA to a Roth. If you think your tax rate is going to rise, this makes a lot of sense, because qualified withdrawals are tax-free.
And one of the great things about converting to a Roth is that you can change your mind. If it turns out that your tax rate is going to drop, you can change your Roth back to a regular IRA by Oct. 15, 2013.
That makes sense! Thanks, Sandy.
Alright, let's go ahead and get started with some reader questions.
Our first one is from Oliver
We don't think blue chips will stop paying dividends or cut back if the rate on dividends jumps from 15% to as high as 39.6%. Investors will be mad at the government; no reason to make them mad at the companies, too. And with interest rates so low, investors love dividend paying stocks.
Sandra, we also have a follow-up question about Roth conversions for you from Garcia.
Thanks for the question. You're correct that when you convert to a Roth, you have to pay taxes on any pre-tax contributions and earnings. But once you convert, all future earnings are tax-free, as long as you wait until you're 59 1/2 and have owned the Roth for at least five years. If you think your tax rate is going to go up, this is a powerful incentive to convert.
also, if the bush tax cuts expire and you'll be in a higher bracket next year, it will be cheaper to convert in 2012
Lots of good tips here. Thanks, Kevin and Sandra
Here's our next question from Larry
Any extra payments would go toward principal, not deductible interest, so it won't help you. Sorry. Now, if you pay your January 2013 payment in December, you could boost your interest deduction a bit
Thanks, Kevin. Here's one about 0% capital gains from Sam
The 0% rate is available for investors in the bottom two tax brackets. We're not sure whether it's going to be extended, so you might want to consider realizing capital gains in 2012.
Kevin, going back to Larry's question for just a minute -- do you have any sense of whether it's likely Congress dumps the mortgage deduction?
Any gains that don't push your taxable income over the 15% tax bracket in 2012 are tax-free. And you can turn around and buy the stock back, thus resetting your cost basis.
Good tip, Sandra. We actually have another follow-up question for you from Garcia.
Highly unlikely that it will be eliminated...the home building and real estate lobbies are awfully powerful and there are millions of homeowners who benefit. The biggest threat, I think, is capping the value, at 28% say, and eliminating interest deductions on second homes and home equity loans...not saying that's going to happen, but I see that as worst case scenario on the mortgage interest front
To Garcia's question, you shouldn't convert to a Roth unless you have enough money outside your IRA to pay the taxes. But remember, you don't have to convert the entire amount. You could do a partial conversion, based on what you can afford to pay.
Prepare for the worst, hope for the best. Thanks, Kevin.
Alright, let's move on to our next question from JSJ
