REFILE-Stern Advice: Your one-week year-end 'fiscal cliff' money plan
By Linda Stern
WASHINGTON Dec 26 (Reuters) - By now, we thought the path forward would be clear and the usual six-day flurry of tax-focused check writing and income-shifting could commence.
But we're still in wait-and-see mode; watching to see what happens next. Either Washington will rush through a year-end package of tax and spending cuts or we will plunge over the so-called "fiscal cliff" of tax increases and sharp spending cuts. Even if that happens, President Obama and Congress could agree on a retroactive package early next year that would limit the repercussions of the over-the-cliff scenario.
So, what do you do now? Avoid placing huge bets and consider these moves while you're watching your government in (in)action.
-- Stash cash for January. It's probably going to be a rough month. Even if there's an 11th hour cliff plan, it is unlikely to reinstate the 2 percentage point cut in Social Security payroll taxes that all workers have been benefiting from for the last two years. That means families with median household income of $50,500 will take home $84 less a month in 2013 than they did in 2012.
Furthermore, January is always a month of reckoning with holiday bills, high heating costs, a resetting of health insurance deductibles and scant balances in flexible spending accounts. So, you're going to need cash. You may even hold on to some money you don't need to disburse until April (like Roth individual retirement account contributions), just to make sure you will have enough on hand to get through January.
-- Shift income based on your income. If you live in a high-tax state, have kids and make between $33,750 and $49,500 ($45,000 to $76,000 for couples), you are a sitting duck for the alternative minimum tax. Originally conceived as a method of insuring that rich people don't get out of paying taxes altogether, the AMT has morphed into an extra tax that penalizes large families and those who pay high local taxes. Congress usually mitigates that by "patching" the AMT rules so they only apply to higher incomes; in 2011 the AMT hit singles earning more than $48,450 and couples earning $74,450. Without a patch moving those numbers up by roughly 2 percent for 2012, they will fall all the way back to $33,750 for singles and $45,000 for couples. It's not entirely clear that a patch can be passed to be effective retroactively for tax year 2012. That is true even though the Internal Revenue Service and TurboTax are already acting like the patch will emerge.
To play that cautiously, don't race to pay your state property taxes before the end of the year. While that could cost you money in April because you will have lower deductions, it will secure your deductions for next year and perhaps protect you from the AMT in 2012, should the patch fail to materialize.
Feel confident that you'll get patched? Write the check now.
-- Sell. If you have not been part of all the selling on Wall Street, there is still time. Your capital gains will be taxed at a rate of 15 percent or less if you sell before the end of the year. In 2013, that rate stands a decent chance of going up to 20 percent. There's no harm in taking the gain now; you can re-buy the same security right away if you want to keep holding it.
-- Write the charity checks. If you itemize deductions they will offset income taxes for 2012, and there's certainly plenty of need wherever you look now. If you are wealthy, you stand a decent chance of having your deductions clipped next year, so you might as well write the checks now.
If you're retired, don't itemize deductions and have been turning over your required minimum IRA distribution to a charity, don't expect the same tax break you got last year. That provision - to allow non-itemizers a tax-free IRA withdrawal if it goes to charity - expired at the end of last year. Maybe it will come back, but that's a very long shot now. Write the check anyway, if you just want to be charitable, but not if you can't afford it without the write-off.
-- Plan to be frugal. There's no version of a "fiscal cliff" resolution that ends with a more expansive government fiscal policy. Either your benefits will be clipped -- in the form of less college financial aid, curtailed Social Security benefits and the like -- or your taxes will go up. Over the long term, items like deductions for mortgage interest on second homes and employer write-offs for health insurance could be in play. Consumers already have shown themselves to be more frugal than they used to be -- holiday-linked retail sales growth slowed significantly once the fast-track "fiscal cliff" fix went off the rails. Households have been paying down debt for much of the last five years. It couldn't hurt to keep that up for a while.
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