In the last remaining days of 2012 it’s prudent to take a few moments from the snowy festivities and drafting of New Year’s resolutions to think about taxes.
“Normally the thing to do would be to make any charitable donations and sell any losing stock to cut down on your taxable income,” said Jim Daniels, a tax partner at UHY Advisers in Albany.
But the fast-approaching “fiscal cliff” is tossing a wrench into normalcy at the end of 2012.
“It’s getting down to the nitty-gritty,” he said. “If the government can’t reach an agreement in the next few days, everyone’s taxes are going to go up.”
That prophesied tax increase changes the usual game plan for many tax attorneys and accountants.
Daniel Ertel, a former IRS agent who now has an accounting firm in Schenectady, has spent 50 years in the tax industry.
“I think I’m just starting to figure it out,” he said.
Ertel recommends his clients move as much of their income as possible from 2013 to 2012. He explained that the old Bush tax cuts are currently set to expire in just a few days and will likely be drastically changed even if Congress does reach some agreement to avert the fiscal cliff.
“It’s a good idea to sell profitable stocks and take the capital gains before the taxes go up,” he said. “If it’s a reliable stock that you like you can even sell it, take the gains, and buy it back again.”
Charitable contributions, he said, should be made next year to soften the blow of higher taxes, rather than in the current year, as accountants usually recommend.
For his wealthier, aging clients Ertel recommends a radical fast-tracking of estate planning. In old age, people with particularly large estates try often to give away as much as they can to avoid the estate tax upon their death.
Currently, those gifts are tax-exempt up to $5 million. Come Jan. 1, taxes will be collected on every gift over $1 million.
For the families of the infirm well-to-do, New Year’s Day is closing in fast, but as Daniels pointed out, very few people ever find themselves in the position of needing to give away that kind of money.
“If you’re thinking about giving away $1 million, you’re probably doing OK,” he said.
For the average paycheck-collecting citizen, he stressed good old-fashioned fiscal responsibility.
“The average person getting a paycheck every week or two doesn’t have a whole lot of flexibility,” he said, adding that most people don’t even make the threshold for charitable donations to actually cut down on their taxes.
For those taxpayers, the main worry is the end of the FICA payroll tax holiday. In the new year, he said, people will likely see an extra 2 percent deducted from their paychecks.
“That will be a shock,” he said.
Planning for the tax increase looks much the same as budgeting for any additional expense.
Albany-based tax accountant Jack Levy suggested many of the usual wise financial practices, such as buying IRAs and paying down the mortgage, but Daniels gave a piece of advice that has been solid for generations: “Don’t spend money you don’t have.”
To make things worse, he said, tax refunds are likely to be delayed as the IRS is bogged down in all the uncertainty.