Year-end tax planning is important

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In most years there are certain strategies to employ near year-end to maximize tax savings. However, this year with the likelihood of a change in tax policy in 2013 different strategies may be necessary.

Generally speaking it is better to defer paying taxes when possible. This reflects the time value of money, as the longer you have use of funds the greater your investment return can be.

This strategy is applicable when tax rates are stable, and your income is similar or greater in the following year. When someone has discretion you would normally accelerate deductions in the current tax year, and defer income into the next year.

What is tricky about the current situation is what taxes for next year will look like. For those who are of lower or moderate income with no significant investment income, then there should be little change in your tax status. Those likely to be impacted would be higher income people, those with significant deductions, and also people with investment income.

For those with a large amount of itemized deductions, it would probably be best to accelerate deductions this year, as they may be curtailed in 2013. For example someone could increase their charitable contributions this year, or prepay state income taxes. However, for those who fall under AMT there would be no benefit in prepaying  state taxes.

With regards to income there is generally less discretion available unless someone has investment or business income. Normally it is is better to defer income into the next year, however, for those who might see an increase in tax rates next year having the income in 2012 might be better. Also for high income individuals tax rates are going up in California next year.

With regards to investment income capital gains rates will likely be higher next year, and taxes on dividends could be considerably higher. However, money in a 401(k) account or an IRA is not taxed until it is withdrawn, so changes in taxes on investment income are not applicable.

For those who have investments in non-retirement accounts changes in capital gains tax rates will have an impact. Unless someone is planning on making a sale in the near future I would not recommend incurring capital gains taxes in 2012. The reason is capital gains taxes can be deferred indefinitely or offset with losses, so the tax may never have to be paid.

If someone has a stock holding that is quite large relative to other holdings, then trimming that position in 2012 would be logical. Also for those who contribute to charities giving a portion of a stock that has appreciated is a way to make use of the charitable deduction and avoid paying a capital gains tax.

For most people 2013 probably should not bring significant tax changes. However, given the size of our budget deficit ultimately middle income people may pay more in taxes than currently, as taxing the rich more will only have a limited  impact on reducing the deficit.