Lately every time I open up my e-mail I am getting a forwarded e-mail from a friend or family member about the tax changes that are coming and how everyone is going to end up paying more money to Uncle Sam. None of these e-mails ever address the most important question we need to ask. What can we do to prepare for these changes?
To start with we need to know what we should not be doing. The worst thing we can do right now is to sit back and think we are going to find out what the 2013 tax rates will be before the end of 2012. The focus of our policy makers right now is the November 6th election so it is likely nothing will be decided between now and then. After that, the House has only scheduled 16 working days before the December 14th holiday recess. The Senate has more but they will not be able to finalize anything without the House. As one can see, there simply is not enough time left in 2012 for our policy makers to make any decisions for the 2013 tax year.
What we should be doing is focusing on what is in our control. Two things that come to mind here are long term investments and Roth IRA conversions.
2012 will still have a preferential tax rate of 15% on long term capital gains and qualified dividends that we may not see again. As a result you may want to consider selling some those long term investments which you were planning on selling eventually to take advantage of the 15% rate. Do not panic and sell every single investment you have which is appreciating. If you do this, you may miss out on additional gains in the future which could outweigh the anticipated increase in tax.
If you have been thinking about converting a traditional IRA to a Roth, you should consider doing it before the end of the year. When a traditional IRA is converted to a Roth all income taxes on the conversion are due in the conversion year. Doing it in 2012 makes sense because income tax rates may be higher in 2013 and a conversion in 2013 may push your modified adjust gross income high enough ($200k single & $250k joint) making you susceptible to the 3.8% surtax on investment income.
The 2013 tax year is certainly still up in the air but there are things we can do to lessen the impact of any tax increases that may come. The remaining time left in 2012 is a valuable tool to accomplish this. Make sure you contact your investment and tax advisors so you are not unprepared.