Friday Financial Five – November 16th, 2012

Friday Financial Five – November 16th, 2012

The writing is on the wall for tax increases and it’s not just the wealthy that are going to be affected. We’ve all heard the words “fiscal” and “cliff” ad nauseum by now. So what steps do you take with multiple tax changes hanging over your head? The easiest and least popular options would be to make less money or work for free. Outside of that, here are some strategies to employ now with the rising tax environment on the horizon.

Increase allocation to municipal bonds in taxable accounts

The tax on capital gains and dividends is almost assuredly going up. That makes the tax advantaged nature of municipals more important. There’s always the threat that the preferential treatment on these bonds will go away or be limited but that’s going to hurt cities and towns at the most inopportune time. Don’t count on muni’s losing their tax exempt status and start reviewing quality individual holdings and mutual funds for your taxable accounts.

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Take income this year instead of next

If you’re lucky enough to control when you get paid, try to take income this year instead of next. For retirees that draw from IRA or other retirement accounts, consider taking more money in 2012. For those taking IRA income and Social Security, be mindful of crossing Social Security tax thresholds.

Take capital gains in 2012

The market sell-off right after the election was largely attributed to a tax dump. The strategy is to sell stocks now in order to avoid a higher capital gains rate in the future. For those that still have losses from prior years, now is the perfect time to offset them with some gains.

Reduce your estate by gifting

It’s the holiday season, so why not make your family happy by giving them some money and reducing your estate? The federal estate exemption is supposed to revert back to $1 million at year’s end, but expect a compromise somewhere in the $3 million to $3.5 million range.

Consider a Roth IRA instead of a traditional

A rising tax environment increases the attractiveness of the Roth IRA. You can either open a Roth IRA or look at converting your traditional IRA to a Roth. Also more prevalent are Roth options for company 401(k)’s. For those making too much money to open a Roth IRA, consider opening a non-deductible IRA and then converting it to a Roth. There is no income limitation to the conversion.

Dan Forbes is a regular contributor on financial issues. He is a CFP Board Ambassador. He leads the firm Forbes Financial Planning, Inc in Providence, RI and can be reached at [email protected]