A taxing time

Fiscal cliff brings more taxpayer uncertainty

Those with some money invested in the stock market have seen some comforting growth in their assets this year. Equity benchmarks have increased 10 or 12 percent year-to-date. Government bonds have done well, too, in appreciated value, as many investors have wanted the security they bring and have bid their price up. Corporate bonds, while not as safe, nevertheless parallel that appeal as many corporations have strong balance sheets.

For those who have held cash, well, they still have just what they started with; interest rates have been close to zero, and are expected to remain there for the near future.

Associated with the nation’s attempt to deal with the approaching “fiscal cliff,” which includes possible higher personal tax rates and large cuts in defense and nondefense spending, are questions associated with year-end tax planning.

The need to increase tax revenue along with budget cuts to bring the nation’s spending closer into line is providing more than the usual number of year-end tax uncertainties.

What taxpayers should do now, before the end of 2012, rather than in 2013 or the years after, is the question.

Next year may see higher tax rates for capital gains, rates closer to the income-tax rates that once applied. If so, selling appreciated stocks now instead of six months from now would be the right thing to do. But, if you like what you’re holding, and are a long-term investor rather than a speculator, then hanging on makes more sense.

Dividends may be taxed at a higher rate in the future, too, narrowing the gap between wage earners’ rates and what those who have capital to invest pay.

It is possible that deductions will be capped in 2013 in order to produce more federal (and state) revenue without having to adjust tax rates upward. That means that rather than reducing the very popular home-mortgage deduction, or limiting the deductions that go with giving to approved charities, total deductions could not exceed a cap, perhaps a percentage of an individual’s income. If that happens, and you care about the charities that you support, you (and they) would be better off to receive an additional amount this year.

Depending on your circumstances, if you have a company health plan fund or an IRA, for example, there are other choices with uncertain answers. See your professional tax adviser.

We all should know by now that raising taxes on the very rich, and adjusting Medicare payments, are insufficient to correct the mismatch between federal revenue and spending. Some tax breaks will have to be reduced or go away, and the wealthiest have to pay more. So, too, middle-level wage earners. This country is spending $3 for every two it takes in, and also in the equation must be some reduction in the total of previous years’ shortfalls.

(Social Security can be easily fixed by adding a year or two to the age it begins to be paid out and to raising the cap on the wage amount that is taxed.)

And time is short. Congress and President Barack Obama have only a few weeks. Thus, it may not be easy to see the direction – and the details – of their negotiations in time to take favorable tax-savings steps.

Taxpayers who itemize their returns and their advisers may be spending a lot of hours together this year-end.