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Money Moves to Consider Amid Fiscal Cliff Negotiations

David Ning

The need to anticipate unknown tax changes and plan accordingly is frustrating. We don't know how much of our hard-earned dollars we can keep next year, and ultimately our chances of a comfortable retirement are on the line. Ignoring this issue is just not wise. Here are a few questions you should ask yourself amid the fiscal cliff negotiations:

Does holding bonds in tax-deferred accounts still make sense? For years, the most tax efficient way to invest was to put bonds in tax-deferred accounts. This is due to the fact that bond income is taxed at your marginal tax rate, while dividends from stocks are taxed at a more favorable rate. This is set to change next year, because the lower dividend tax provision is set to expire. Of course, there's a chance that Congress may come up with a deal to extend the lower rates, but don't bet on it, especially if you have a high income.

Even if you aren't in the highest earnings bracket, putting stock funds in tax-advantaged accounts may make sense now. After all, the yield on the S&P 500 is hovering around 2 percent, which is higher than many bond funds. Furthermore, stock funds are expected to generate higher capital gains than bond funds in the long run, which shifts the vote in favor of having stock funds in tax-deferred accounts even more.

Is the order you are contributing to your investment accounts still in your best interest? Deciding how much to contribute to a 401(k), Roth IRA, and taxable investment accounts can be a complicated decision, but everyone ought to rethink their decision due to the changes in tax rates. Make sure you are also taking into account state tax changes, since some states, such as California, have upped their tax rates for many people as well.

Does the usual tax-deduction strategy still apply? Many of the usual tax-deferral strategies, like making extra mortgage payments two weeks earlier, may not make sense this year if your marginal tax rate is going to be higher next year. Sure, you are going to pay more to Uncle Sam in April, but delaying it another year may give you another few percentage points worth of tax deductions. Obviously, you are betting that the Bush-era tax rates won't be extended for your income bracket and that you'll make similar income, but this is probably a good bet to make for most of us who receive a salary.

Does capital gains harvesting make sense? Normally, you want to defer capital gains for as long as possible because the taxes you pay are lost forever. But it may make sense to capture some of that gain now because capital gains tax rates may stay elevated for a very long time. Just make doubly sure that you have your cost basis set to specific lots so you can pick only the tax lots that have long-term gains. With the passage of the Patient Protection and Affordable Care Act along with the investment surtax on high income tax payers, it is extremely likely that those who meet the requirements will pay a higher long-term capital gains rate next year. But for the rest of us, gains harvesting is a bet on whether the long-term capital gains rate will be extended through the fiscal cliff negotiations.

And don't just think of capital gains as stocks and bonds either. Any type of investment, whether it's real estate or even a business, is subject to capital gains taxes. In the case of homes and businesses, the consequences of your decision are even greater because of the dollar amounts involved, so pay close attention. Obviously, it makes no sense to sell a business just to capture a lower tax rate, but those who are planning to sell a highly appreciated asset in the next couple years may want to accelerate the process and do so this year.

No one knows what Congress will ultimately agree upon, but it pays to focus a bit of your attention on the upcoming tax changes and adjust accordingly.

David Ning runs MoneyNing, a personal finance site that shares money moves you can make to significantly increase your chances of having a comfortable retirement. He likes to share simple changes that anyone can make, such as picking the best online savings account and figuring out whether a 0 percent balance transfer credit card makes sense.

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