Rethink your capital gains strategy this year

The typical investment advice at year-end is to sell losing stocks to offset gains you have taken for the year. This year that strategy may just be the wrong way to go. Here's why.

The maximum rate on long-term capital gains is scheduled to rise from the current 15% to 20% next year. Also scheduled for 2013 is an increase in the top rate on dividend income from the current 15% to 39.6%.

If you expect these scheduled rates to occur in 2013, it may make sense to harvest gains before year-end. Remember, wash sale rules do not apply to gains, so you can repurchase a similar investment immediately. This tactic may allow you to "reset" your basis for a future sale while benefiting from current low rates.

What about investment losses? Despite the uncertainty over a possible increase in tax rates, it's a good bet that some rules -- such as those covering capital losses -- will not change. When pruning stocks from your portfolio, keep in mind that capital losses are more valuable when tax rates are higher. You may want to postpone taking losses until 2013 if you think rates will be higher next year.

In your investment review, don't overlook the new 3.8% Medicare surtax that will apply to certain unearned income, including interest, dividends, capital gains, and passive rental income. If this surtax goes into effect as scheduled, an individual with adjusted gross income of $200,000 or more ($250,000 for couples filing jointly) could pay an effective federal income tax rate of 43.4% on some income.

Individual situations will vary, so consider all the relevant factors in making your year-end decisions. For assistance in your analysis, contact our office.

What's a lame duck, and what does it have to do with Congress?

We'll have some political lame ducks this year, and Congress will convene a lame duck session after the November election. A quick reminder about lame ducks: A member of Congress who lost his or her bid for reelection in November 2012 will still be in Congress until January 2013. Because the individual will not be in the new 2013 Congress, he or she is considered a lame duck lawmaker (with less influence than those who will sit in the new Congress).

A lame duck session of Congress occurs in even-numbered years following the midterm elections held in November. Congress is reconvened after the election to complete whatever unfinished business remains for the year. Because some of the members failed in their reelection bids and will be out of Congress in January, they are lame ducks and the session is called a lame duck session.

Analyze your customers for a better business

If your business is like most, you put a lot of effort into attracting new customers. After all, that's an essential part of growing the business. But sometimes it's more productive to step back and review your existing customers, and perhaps even get rid of a few.

You might be surprised at what you find if you take the time to analyze your customers. Start by listing customers in order of sales. Then make your best estimate about the cost of those sales. For example, you might give volume price breaks to your biggest customers that make them less profitable than smaller customers. But don't just look at the cost of sales. Ask your sales staff, your customer service staff, and your accounting staff to assign a simple grade to your customers (e.g., A, B, C, D, or F). This will give you a relative measure of how much time and effort each customer requires.

Once you have profitability and customer care information, you can begin to rank your customers in groups from best to worst. The "best" are easy. They're the customers you should make a special effort to appreciate and retain.

You have several options for the "worst" group. With some customers, you might want to change your pricing structure to charge them for the excessive costs and attention they require. With others, you might want to sit down and address specific problem areas. Sometimes just making customers aware of problems can produce positive joint solutions.

In some cases, the only solution is to part ways. Do this gracefully, without creating unnecessary ill will that can come back to haunt you. If possible, find a plausible business reason to support your action. But if necessary, be blunt and tell the customer that you're cutting back to provide better service to your top customers. Suggest alternative suppliers they might contact to fill their needs.

Eliminating customers may be counter-intuitive, but it can work wonders for your bottom line and your staff's morale. Call us if you'd like assistance with the financial analysis of your customers.

Beware of tax scams

It's likely to be a daily occurrence: Your e-mail inbox contains at least one message touting a too-good-to-be-true offer. You probably shake your head and delete the pleas from mysterious mock millionaires who need your help recovering imaginary inheritances.

But what do you do when the e-mail has the Internal Revenue Service web address in the FROM box and a subject line that claims you're about to be audited by the Criminal Investigation Division?

*Step 1. Stop and think. You've never given the IRS your e-mail address in relation to your tax return. Even if you had, the government does not request personal information such as your bank account, credit card, or social security numbers via e-mail.

*Step 2. Without clicking on any links or responding to the e-mail, forward the entire message to the IRS (phishing@irs.gov). The IRS established this e-mail box in 2006 to investigate and shut down online fraud.

Note: You will not get a response, either online or off, from the IRS when you report scams.

*Step 3. Delete the e-mail.

Besides the audit subterfuge, other common e-mail tax schemes to know and avoid include a promise of additional money due, bogus government grants, and requests for you to check the status of your refund.

Tax scams never die, and they can be taxing. Before you react to any communication from -- or purporting to be from -- the Internal Revenue Service, contact us. We're here to help you resolve tax issues.

Decide when to pay tax on U.S. savings bonds

When you own Series EE or Series I savings bonds, you have a tax decision to make. Both types of bonds earn interest monthly. Usually, you’ll choose to defer paying any taxes on the interest until the bond reaches final maturity or you redeem it, whichever comes first. At that time, you would report and pay taxes on the total interest earned over the life of the bond. (If you meet certain requirements, you might avoid paying any taxes by using the bond proceeds to pay for higher education expenses.)

The alternative method is to report the interest earned each year as part of your taxable income. Most people choose the first method because it lets you delay paying taxes for as long as possible. But sometimes the annual method makes sense -- for example, if a young child has been given a savings bond in his or her own name.

The tax rate on investment earnings of a child under age 19 (under age 24 for full-time students) is the parent’s marginal rate when the "kiddie tax" applies. The kiddie tax is intended to stop parents from shifting income to their children. But even under the kiddie tax rules, the first $950 of a child’s investment income in 2012 is tax-free and the next $950 is taxed at your child's lower tax rates. So if your child expects to earn less than $1,900 from savings bonds and other investments, reporting the interest as income each year could make good tax sense.

For further details on this and other tax-saving strategies, please give us a call.

Identify shares you're selling

You can often manage the size of your gain or loss when you decide to sell some, but not all, of a particular stock or mutual fund. To do this, you must have kept good records of the date and the price for each share purchase. By selling the highest cost shares first, you'll minimize your taxable gain or maximize your loss. You must specify the particular shares you are selling at the time you sell.

Don't be tripped up by the wash sale rules

If you sell a security before the end of 2012 to take advantage of a capital loss, be aware of the wash sale rules. To make sure the loss is deductible, refrain from buying the same security or a substantially identical security during the 61-day period that begins 30 days before you sell and ends 30 days after.

Basis reporting requirement delayed

A law passed in 2008 requires brokers to report an investor's basis in stocks and mutual fund shares when these investments are sold. The final step in these new reporting requirements was to become effective for debt instruments and options on January 1, 2013.

The IRS has announced a delay in the effective date, moving it to January 1, 2014. This one-year delay is in response to complaints that the earlier deadline did not give brokers and other financial institutions time to build and test systems to handle the complicated basis reporting requirements.

Give your children some lessons about money

There's one important subject that your children may not learn in school: personal finance. If you want your kids to pick up good money skills and become financially responsible adults, you should give them some training yourself.

Pre-schoolers and teenagers obviously have different financial concerns and abilities. But there are a few basic lessons that all children should learn by the time they enter college or start a career.

*Having money means making choices. Teach your child how to choose between spending and saving, and how to do both intelligently. A regular allowance will help your child gain real-world financial experience.

*Money requires planning. At the appropriate age (usually about nine or ten), show your child how to develop a simple spending plan. In later years, show how to plan for larger expenditures.

*Money means responsibility. Inevitably, your child is going to make some money mistakes. Try to avoid criticism, but don’t automatically fix every problem and let your child off the hook. Help analyze the reason for the mistake, and suggest how to avoid it in the future.

*Money needs to be managed. Specific lessons might range from how to compare interest rates on savings accounts, to the pros and cons of mutual fund investing. But there should be one common element to all of your teaching in this area: money doesn't take care of itself.

The way you handle your money may be the most powerful lesson of all for your children. For your child’s sake, as well as your own financial well-being, it’s important to practice what you preach.

Roth conversions are taxable

If you convert a traditional IRA to a Roth, there's a price to pay. Converted amounts attributable to tax-deductible contributions, plus all of the earnings, are taxable at ordinary income rates. To lessen the tax hit, you may choose to convert only a part of your IRA to a Roth. You can convert as much as you like, or you can convert some each year if that seems advisable.

The alternative minimum tax: Will it affect you?

In your tax planning, don't overlook how your tax-saving strategies might be affected by the alternative minimum tax.

 * What is the alternative minimum tax?

Enacted back in 1969, the alternative minimum tax (AMT) was designed to make sure that high-income taxpayers pay a minimum amount of taxes, even if they have sufficient deductions and credits to reduce their federal income tax liability to zero.

The AMT is like a flat tax. You get a lower tax rate in exchange for losing most deductions.

To calculate the AMT, start with regular taxable income, which includes all your familiar deductions and exemptions. Then make certain adjustments and add back certain "preferences" to arrive at your AMT income. Preferences include personal exemptions, state and local taxes, certain interest on home-equity loans, and miscellaneous itemized deductions.

After adding back the preferences, you're entitled to an exemption amount, though the exemption phases out at higher income levels. The exemption for 2012 is $33,750 for singles and $45,000 for married couples filing a joint return.

You then calculate your AMT by applying a tax rate of 26% to the first $175,000 of AMT taxable income, and 28% to any additional amounts. Finally, you compare your AMT to your regular tax and pay whichever is greater.

* Who is affected by the AMT?

Congress created the AMT to ensure that wealthier taxpayers, who often have the kinds of income and deductions that qualify for preferential tax treatment, would pay at least a minimum amount of tax. Congress also wrote exemptions into the law, so that middle-income taxpayers wouldn't be subject to the AMT.

Unfortunately, these exemptions were not indexed for inflation. As incomes have continued to rise, more and more people have found that they need to calculate their tax bill twice -- once under regular tax rules, and again under the AMT.

Though Congress has expressed a desire to eliminate the AMT, it is still in effect. Every year thousands of middle-income taxpayers find themselves subject to the alternative minimum tax.

 * Will the AMT affect you?

Do you need to concern yourself with the AMT? You do if you have a lot of dependents or if you claim substantial itemized deductions. You may also be subject to the AMT if you realized hefty capital gains during the year or exercised incentive stock options. Claiming certain tax credits might trigger the AMT as well. And if you are an owner of rental real estate or a capital intensive business, you need to be aware that the amount of depreciation allowed under the AMT is limited.

Don't forget the AMT in your tax planning. You may be one of those middle-income taxpayers who is now subject to this tax. For details or planning assistance, contact our office.