MAKING CENTS: Plan for 2013 taxes while you prepare this year’s return

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As we are all gathering the important tax documents needed to prepare your 2012 tax returns, imagine how your return might look under the new tax rules in effect for 2013. This could actually give you the first glimpse of what these new tax rules mean to you personally.

The time to plan for a lower tax bill is now. There isn’t much that you can do for last year at this point, but for 2013, you have the next 10 months to carefully plan to keep your income tax bill as low as legally possible. No one really knows who took advantage of the lower rates we saw in 2012 by accelerating income or creating capital gains, but everyone is now concerned about what the new tax rules will cost them.

To plan for 2013, start with a forecast of what you expect to happen for income-related items in 2013. It may be difficult for some to forecast 2013 earnings because they own a business or have a job with variable compensation. But at this early stage, you must come up with a forecast if you want to fully assess the potential moves. Use the data from your current return to estimate what each line item of the return may look like in 2013 without any additional planning. From here, you can overlay strategies and ideas and assess the consequences.

A strategy gaining a lot of momentum in professional circles is the concept of asset location. Asset location has to do with the type of account that you plan to house certain investment within. For example, placing high-interest or dividend holdings inside a qualified umbrella such as an IRA may make more sense than holding these instruments in a taxable account. This concept has always been available to investors, but it is gaining in popularity now that rates have in fact risen.

Another strategy is to use annuities in lieu of traditional taxable savings. A caution here is the lock-up period, surrender charges and the underlying strength of the insurer guaranteeing your money. Avoid long surrender periods and long lock ups, and steer clear of companies that are less than very highly rated.

For the charitably inclined, this is the time to look at contributing appreciated property rather than selling it yourself and then donating the cash. A donation of appreciated property will give a deduction equal to the fair market value of the property on the date of the gift, without regard to your cost of the property. Rental real estate could pose special other tax provisions such as accelerated depreciation recapture, so check with a tax professional before you simply give away any rental real estate.

For every taxpayer in America, taxes have gone up. Hopefully that additional tax burden won’t cause the tax tail to wag the dog, but paying attention as you go this year could make a material difference in your total taxes for next year.

John P. Napolitano is CEO of U.S. Wealth Management in Braintree, Mass., and 2012 president of the Financial Planning Association of Massachusetts. He may be reached at jnap@uswealthcompanies.com or on Facebook as JohnPNapolitano and US Wealth

John Napolitano is a registered principal with and securities offered through LPL Financial. Member FINRA/SIPC. He can be reached at 781-849-9200.

Securities offered through LPL Financial, Member FINRA/SIPC.
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