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Don't Put Mid-Year Moves On Hold

Tax planning isn’t just for the end of the year. This is especially true in 2012, a year in which a national election could affect tax policies, and when several key tax breaks are slated to expire. What should you do in this situation? Here are five midyear tax-planning moves that may improve your financial picture:

1. Harvest tax losses. If you’ve realized capital gains from securities sales this year, you can use any capital losses before the close of the year to offset those gains, plus up to $3,000 of ordinary income. If now is a favorable time from an investment perspective to sell certain securities, don’t wait until year-end to take action.

2. Realize capital gains. Conversely, any capital gains you recognize now can help you take advantage of earlier losses, making your profits effectively tax-free up to the amount of your losses. Furthermore, the maximum tax rate on long-term capital gain (for securities held longer than a year) in 2012 is only 15% (0% for lower-income investors). The top rate is set to jump to 20% (10% for lower-income investors) in 2013, barring legislative changes.

3. Invest in dividend-paying stocks. Like the current break on long-term capital gains, a favorable tax provision for “qualified dividends” (paid out by most domestic corporations) is scheduled to expire at the end of the year. Currently, the maximum tax rate for dividend profits also is only 15% (0% for lower-income investors). Beginning in 2013, however, dividends will be taxed at ordinary rates that could reach as high as 39.6% (up from the current top tax rate of 35%). If you invest in stocks now that will pay dividends at year-end, you could reap tax benefits.

4. Dodge the “wash sale” rule. Under this rule, you can’t deduct a loss from the sale of securities if you acquire “substantially identical” securities within 30 days of the sale transaction. To avoid tax problems, wait at least 31 days before you buy back the same or similar securities. Alternatively, you could “double up,” acquiring the new securities now and waiting at least 31 days before selling the original shares.

5. Contribute to your retirement plan. It’s easy for employees to contribute to a 401(k) plan during the year through regular payroll deductions. If you’re self-employed, you might set up a comparable plan, such as a Savings Incentive Match Plan for Employees (SIMPLE) or a Simplified Employee Pension (SEP). Caution: Although you have until the 2012 tax-return due date (plus extensions), to get a SEP started, the deadline for setting up a SIMPLE for 2012 is October 1.

Of course, tax laws are ever evolving and you might have to make wholesale changes in your game plan after the election. We’ll keep you up to date on new developments.


This article was written by a professional financial journalist for Legend Financial Advisors, Inc. and is not intended as legal or investment advice.



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