Friday, June 15, 2012

Tax Planning 2012: Last Chance!

By Bert Whitehead M.B.A, J.D. © 2012

Taxes are the biggest debate this election year. Will there be a change passed for next year? Looks doubtful, eh? And if there's no change, we go back to the tax rates of 2002. That means the top rate goes to 39.5% from today's 35%, and other changes reappear which will increase income taxes across the board. Even if a tax bill passes, it will likely include a tax increase.

For those who want to position themselves financially for a higher-tax world in the future, there are two items to consider:

1) The tax deduction for charitable contributions is likely to be reduced or restricted after 2012. This could affect the advantages of using a Donor Advised Fund (DAF) for philanthropy. The Wall Street Journal article, “Invasion of the Charity Snatchers!” covered this on Sat. June 6 and referenced me therein (

2) 2012 will be the best year to convert IRA's to Roth IRA's for many taxpayers who are likely to be in a lower tax bracket now than future years.

The tax planning strategy consists of contributing highly appreciated stock to a DAF before December 31st of 2012. Under current rules, this will avoid the tax on all the appreciation and provide the taxpayer with a charitable deduction for the full market value of the stock. For example, suppose that a taxpayer purchased stock years ago for a low price of $2 per share and it is worth $42 per share today. There is an unrealized capital gain of $40/share. If you hold 1,000 shares, the capital gains tax on the $40, 000 based on current legislation (15% federal) will be $6,000. This tax is avoided by making the donation.

In addition to this savings, the taxpayer will also receive a charitable deduction for the full $42,000 market value of the stock. This will save a taxpayer in the top bracket (35%) $14,700 in 2012 income tax.

The taxpayer can simply save these tax dollars, or they can be applied against the cost of a Roth IRA conversion. If the taxpayer chooses to convert $42,000 of an IRA to a Roth IRA they can do so for no additional tax cost because the additional taxable income of $42,000 for the Roth conversion will be offset by the $42,000 charitable contribution deduction.

To review the full discussion on the current rules on converting IRA's to Roth IRA's, please see Bert's Blog on Roths from 3/2/10(

Our analysis shows that the taxes saved by having your retirement money grow tax-free in a Roth would fully offset the taxes paid now to convert the funds in seven years. So by paying taxes on the IRA money now, you could increase your after-tax retirement income by 13% to 28% for the rest of you and your spouse's lifetimes!
There are still six months left to implement this strategy, and it is somewhat complex. If you are interested, call your Cambridge advisor to discuss it. All members of the Alliance of Cambridge Advisors (ACA) know how this can be set up and can assist you in the implementation.

I appreciate the editorial review contributed by Chip Simon, CFP®, an ACA colleague in Poughkeepsie, NY.