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.
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
Let's skip the gift allowance and get right to cash versus stock.
When it comes to year end gifts, if you have owned an appreciated security for over a year, giving it to charity lets you deduct the current fair market value. Neither you nor the charity every have to pay tax on the gain. This is for charitable contributions.
If you're talking about gifts for estate planning purposes, it's usually best to give away stocks that might appreciate in the future so you get that future appreciation out of your estate.
If Congress doesn't act, the amount of gifts protected from the federal gift tax will fall from $5.1 million this year to $1 million in 2013
Wow, that's a pretty big drop Kevin.
that's why we call it a cliff
We actually have another question relating to the gift tax from Gordon
We have a story in the upcoming issue that addresses this. While everyone wants to avoid estate taxes, you should never give away money you may need in the future. Gifts must be irrevocable, so you can't ask for the money back. Don't succumb to pressure, Gordon!
Hey. Gordon, watch your wallet!
And even if the estate tax drops, most of us won't have to worry about it.
Have a nice Thanksgiving...
Alright, let's move on to this next question from Jon about the Bush tax cuts
Oh, my...let me count the ways. Remember the first Bush tax cut was before the 9-11 terrorist attacks and that was a long time ago.
One study says the average tax bill will go up $3,700 a year
And while we're still talking about the gift tax, here's a follow-up question from jsj.
But none of us are average. The first thing you'll notice is the end of the 10% bracket, so the rate on your first $17,000 on a joint return will jump to 15%..that will cost you $850.
The child care credit will go down.
The marriage tax penalty will roar back to life.
The child will be cut in half from $1,000 to $500
Those are two big ones, Kevin.
We'll see the estate tax exemption drop from $5.1 million to $1 million and the rate jump to as high as 55%.
And a whole slew of tax breaks we've become accustomed to will go away, affecting everything from college tuition payments to charitable gifts from IRAs.
The tax rate on dividends will go from 15% to your top tax bracket, as high as 39.6%
As you see, there's a lot packed into this fiscal cliff.
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.
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