End-of-Year Financial Planning Tips for Boomers

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Published December 19, 2012

| FOXBusiness

“The Boomer” is a column written for adults nearing retirement age and those already in their “golden years.” It will also promote reader interaction by posting e-mail responses and answering reader questions. E-mail your questions or topic ideas to thefoxboomer@gmail.com.

As we prepare to ring in a new year, we might have a rude awakening of what 2013 has in store: higher taxes.

If Congress fails to come to an agreement over the fiscal cliff before Dec.31 we can all expect higher taxes and automatic government spending cuts. What’s more, an analysis by the Tax Policy Center shows that nearly 90% of Americans will pay higher taxes next year and the average household tax bill will increase by $3,500. 

Changes to the estate tax, taxes on wages and investments and the elimination of other tax breaks can have a substantial impact on baby boomer’s budgets and future financial planning.

As we all wait to see what Congress will do before year’s end, I asked Deb Repya, vice president of Advanced Markets for Allianz Life Insurance of North America, to share year-end tax tips boomers in areas we still have control over. Here is what she had to offer:

Boomer: What would you advise baby boomers to do regarding reduced capital gain tax rate for 2012?

Repya: In 2012 the long-term capital gains tax rate is zero for taxpayers in the 10% or 15% federal income tax bracket and 15% for taxpayers in a higher bracket. These rates also apply to qualified dividends. These capital gains rates should be considered if you are contemplating a sale of property with potential capital gains tax implications. If you also have assets in a loss situation, gains and losses are netted, and losses generally are deductible up to $3,000.

Keep in mind that under the "wash sale" rule, if you buy the same asset within 30 days before or after the sale, tax law does not allow the deduction. The federal capital gains tax rates are scheduled to increase in 2013 unless Congress acts, so harvesting gains or taking qualified dividends now in 2012 might provide advantages to certain individuals.

Boomer: How can cash gifts to a charity help with itemized deductions?

Repya: Cash gifts to a charity are deductible as an itemized deduction subject to a limit of 50% of the taxpayer's adjusted gross income. Itemized deductions are not phased out for 2012 so some high-income individuals may wish to maximize their gifts to charity in 2012. If the gift exceeds the limit, deductions can be carried over for five more years.

Boomer: When should boomers take required minimum distributions?

Repya: If you have an individual retirement account (IRA) or qualified plan, you may need to take distributions from it by Dec. 31. Most IRA owners or qualified plan participants who are age 701/2 or older must take minimum annual distributions from them. The federal additional tax for not doing so is 50% of the amount that should have been distributed.

Boomer: What should we know about the gift tax exclusion differences between 2012 and 2013?

Repya: Annual exclusion gifts of a present interest of $13,000 for 2012 (indexed in future years, $14,000 for 2013), can be given to anyone without incurring a federal gift tax. Gifts in excess of this amount or those that do not qualify as a present interest are applied against the applicable gift tax exclusion, currently $5,120,000 (for 2012). Any gift in excess of $5,120,000 (for 2012) will be taxed at a 35% maximum federal gift tax rate.

For 2012, note that the gift tax exclusion affects the estate tax exclusion. The federal estate and gift tax exemptions and rates are scheduled to change for 2013 with higher estate and gift taxes unless Congress acts, so gifts in 2012 might provide advantages to certain individuals. 

Boomers should also consider tax-deferred strategies. With income tax rates likely to change in the future, you may wish to consider the value of owning tax-deferred products, subject to your own financial and retirement goals.

You should always consult with your personal tax advisor before you adopt a specific tax strategy. Your financial professional can also assist you as you consider any new financial products that make sense for your situation.

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