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    • Tax Uncertainty for 2011

    Congress’s special 12-member deficit-cutting committee has yet to come to an agreement regarding the U.S.’s fiscal distresses. For a third year in a row taxpayers are heading into December with tax issues unresolved.

    Here are some suggestions to guide you through the end of the year as well as longer-term issues to consider.

    Investments

    Capital gains, interest and dividend rates haven’t been decided on what they will be in 2013. What we do know is that long-term gains and dividends is a historic low at 15% and a new 3.8% tax on net investment income is set to take effect in 2013. These tax rates will affect taxpayers with adjusted gross incomes of $250,000 or more ($200,000 for single filers), and the levy will be applied to taxable interest, dividends, rents, some annuities, royalties and capital gains, including the sale of a house, after a $500,000 exclusion ($250,000 for single filers).

    Cost-basis reporting – A new rule regarding “cost-basis” or purchase price will be applied to stocks bought on or after Jan 1, 2011. Brokers must provide the IRS with “cost-basis” or purchase price on stocks sold from a taxable account. Most brokers have already suggested customers pick a cost-basis method for use when less than 100% of a position is sold. This choice will be important since profits and losses are measured from the purchase price. Some methods are first-in, first-out; last-in, last-out, highest-cost, first-out as the default-which could raise taxes paid. A customer is allowed to switch methods but it must be done before selling shares.

    Stock gains and losses – The tax rate on long-term capital gain is 15%, but investors should still try to time gains and losses to minimize tax. Adding to this, up to $3,000 of long-term losses can be deducted against ordinary income from wages or other sources, which are taxes at up to 35%. Remember unused losses can be carried over to future years. While timing your sales, be sure to avoid wash sales. IRS rules disallow current loss deductions if the same investment is acquired less than 30 day before or after a sale. However, a stock may be repurchased immediately and sold at a gain, even if the gain will be offset by a loss.

    Charitable Gifts

    The current rule for donations appears to be set through 2012, but some proposals in Washington could change the value of deductions for people in higher brackets in 2013. The Pease limit, which disallows 3% of itemized deductions for upper-income taxpayers is scheduled to return in 2013. Current rules allow a deduction up to 50%, 30% or 20% of AGI, depending on the recipient and type of property donated. Overall, the 50% limit applies to cash gifts while the 30% limit applies to appreciated assets. To avoid capital-gains tax and get a full deduction for the gifts value you should donate appreciated assets, such as shares of stock rather than cash.

    IRA charitable donation – This provision has been extended by Congress through 2011 but will not be in effect for 2012. This provision allows donors over 70 ½ may contribute up to $100,000 of IRA assets to one or more qualified charities. The gift must be sent directly to the group. This donation will not generate a deduction but the amount will be excluded from income.

    Retirement

    Be sure to take your required IRA payouts, two-thirds of IRA holders have yet to take their payouts which must be withdrawn by December 31. There is an exception for taxpayers taking their first required payout may do so by April 1, 2012 but remember this could cause “bracket leap” by raising income for 2012.

    Roth IRA conversions – IRA conversions must be complete by year end in order to count for 2011. There is no longer an income limit as to who may convert regular IRAS to Roth accounts. Income tax is due on the conversion, but qualified withdrawals are tax free. Roth IRA income won’t be subject to the 3.8% tax on net investment income that arrives in 2013.

    If you would like to find out more about how to save on your upcoming tax return, contact us about doing a tax plan which guarantees $400 in tax savings or else your tax plan is free!

    Kirsten Windisch | 11/30/2011