No one can predict the market, and with taxes on the table, it's tough to know what next year will bring on that front, too. But a number of money-saving opportunities exist through 2012; here are five ways you might profit from today's IRS rules and rates:
1. If you have a sizable estate, this is a good time to give some of it away while you're still alive. The current estate and gift tax exemptions and rates are the most generous in many decades, says tax historian Joseph Thorndike. As recently as 2010, though no estate tax applied for that year, the gift tax exemption limited you to handing off $1 million free and clear. (If that sounds like more than you can imagine passing along, keep in mind that many people would hit it quickly, counting the value of their real estate.) But at least for 2011 and 2012, each person can give away $5 million without paying a penny in taxes--which makes now an advantageous time to set up a trust for your grandchildren, say, or to hand over part of a closely held business. "We don't know what the law will be like in 2013," says Mark Nash, a Dallas-based partner in the personal financial services practice of Price-waterhouseCoopers. "But it's unlikely it will be this generous."
2. People making money from a hobby may benefit by starting to run it as a business before the end of this year. As of last January, anyone who sells something is subject to a new kind of reporting by the companies handling the transactions. If you have more than 200 transactions totaling over $20,000 per year on eBay or on MasterCard or Visa from peddling your wares at craft fairs, say, you (and the IRS) will get a 1099-K showing your take. Handling it as a business rather than a hobby will allow you more generous deductions, says Eva Rosenberg, a tax expert who answers questions and offers professional education at www.taxmama.com. For example, expense deductions from a hobby are limited to the amount of income it brings in and reduced by 2 percent of your adjusted gross income, no matter how much you actually spent. One easy way to establish that you're truly in it for money: Write up a business plan.
3. Take some deductions early. There's a lot of talk about capping the generosity of itemized deductions as a way to raise more revenue. Those in a high tax bracket may want to prepay real estate taxes and state income taxes so as to nab the greatest benefit while it's still available. This strategy also applies to other expenses you can accelerate: the points you pay upfront to refinance a mortgage or buy a house, for example, and unreimbursed professional dues.
[See the Top 10 Individual Tax Breaks.]
4. Take advantage of the zero percent capital gains tax available through 2012 to low-bracket taxpayers; for this year, that means single taxpayers with taxable income of no more than $34,500 and joint filers with up to $69,000. Retirees who come in under these income limits may want to bump up against the ceiling by realizing some of their investment gains in 2012 rather than in 2013, says Kay Bell, who writes the popular "Don't Mess With Taxes" blog. For people in higher brackets whose stocks have appreciated significantly and who are interested in giving money to adult children or elderly parents, Rosenberg suggests thinking about giving them shares if they're in the right income range. They just can't be your dependents; if the capital gains were realized by a dependent college student, for example, they'd be taxed at your rate. "This is something that costs you little and could cost them nothing," she says.
5. Anyone who has sold a business, a building, or some other asset by setting up an installment agreement with the buyer might benefit by urging him or her to refinance and pay up completely as soon as possible. "I'm sure this 15 percent capital gains tax will end in 2012. You don't need a crystal ball to see that," says Rosenberg, who expects a dramatic increase by 2013.
The move shouldn't be a tough sell to make to your buyer, she says, because interest rates worldwide are low and will almost certainly go up. If you need to sweeten the deal, she suggests offering to pay some of the refinancing fees. "It will reduce your profit, but you're still going to save a lot of money in the long run."
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