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The Advisory Firm Newsletter:  December 2012

THIS MONTH IN PERSONAL FINANCE: Planning tips for year end 2012.


This month we will review the potential tax rates for next year, discuss Roth IRA options for higher income earners and discuss charitable contributions.

Potential Tax rates for 2013:

We first covered this fiscal cliff issue back in the June newsletter. Since it is now front and center, I will give you a quick recap of current income tax rates and those currently slated for 2013:

income level
2012 rates
est. 2013 rates 
up to $47,350
up to $122,300
up to $198,050
up to $388,350
over $388,350


Capital Gains and Dividend Tax rates:

Currently the Long Term Capital Gain tax rate is 15%. This is slated to revert back to the 20% rate starting next year. Qualified Dividends have been treated nicely with a 15% income tax rate, beginning next year they are scheduled to revert to your ordinary income tax rate listed above. In addition, for higher income earners ($250k+) you will see a 3.8% additional "unearned income Medicare contribution tax" on any Net investment income you earn (interest, dividends, cap gains, rents and pass-through income from passive businesses)

... and for those higher income earners an additional .9% medicare tax increase from 1.45% to 2.35%. This is the medicare portion of your withholdings on your paystub. Your employer gets to pay the other half. (this was covered in the attachment to the July newsletter)

Estate Taxes:

In June we also discussed the changes ahead for Estate Taxes. Remember back in 2010 when the Estate Taxes dropped to 0%? We all kept thinking that there wasn't anyway Congress would let that slide. We even thought they would retroactively reinstate the tax during the year - but they didn't. This year if you die and your estate is under $5 Million, you pay no estate taxes. Next year is a different story. The exluded amount drops back to $1 Million and will affect a greater number of households.

What to do?

Congress could of course come up with a "patch" or temporary fix by the end of the year, or they may not. They could reconvene early next year and retroactively issue a fix and kick the can a little further, or they may not. No one really has any idea. One thing you can to is to be proactive and start talking with your Accountant about tax strategies. You need to decide if taking some capital gains this year is a wise move or possibly changing how your dividend investments are structured. Unfortunately it is a moving target with no easy solution.



Roth IRA contributions for higher income earners?

There have been a few articles floating around about how higher income earners that are phased out of contributing to a Roth IRA can actually get around the rule. The strategy goes something like this:

-Open a "non-deductible" IRA and contribute $5000. (any income level can contribute to a non-deductible IRA)

-Then do a "roth conversion" of that money and convert to a Roth IRA.

The strategy is legitimate as long as you don't have any other IRA's out there. Why is that the case? Simply because what Natalie Choate (IRA Expert) calls the "cream of the coffee" issue with the IRS.

When looking at a Roth Conversion the IRS looks at the aggregate value of all of your after-tax and pre-tax IRA accounts to determine the percentage applicable to the Roth Conversion. If you do a Roth conversion just like cream with your coffee a little pre-tax money is included with your after tax money which flows into your Roth. So if you open the non-deductible IRA with the intent of converting $5000 into a Roth, but you have a $100,000 IRA Rollover out there as well then you could have some tax issues.

The fraction for determining this calculation:

Total Non-Deductible Contributions/Total aggregate value of all IRA's

*Please always check with your tax or financial advisor prior to acting on any strategies.


Year End Charitable Donations:

It does seem as if I am recapping many of the topics already covered in this years newsletters, but here is another one worthy of a second consideration: Charitable Donations.

Since we are nearing the end of the year there are a number of ways you can do good and save on taxes (although the charitable deduction is also in line to be phased-out for higher income earners in 2013 unless a patch is implemented).

Ways you can contribute to Charitable Organizations:

- you can gift cash, stock or property.

- you can deduct up to 50% of your Adjusted Gross Income as long as your gifts are to a charitable organization that meets the IRS' guidelines of a qualifying 50% Organization. You can "carryover" any excess deduction amount for up to 5 years. (and the answer is NO, you cannot deduct your contribution this past fall to any political organization!)

How to contribute:

- Just writing a check or transferring investments directly from your account are acceptible for most charities.

Something bigger:

Do you want to get your tax deduction but spread your donations out over time? Below are a list of ways to do just that. It's a little more advanced and the only one you could probably get completed prior to year end is the first one:

- Donor Advised Fund (available through most mutual funds and The Community Foundation of Atlanta). You contribute a lump sum and each year distribute a percentage of it.

- Charitable Remainder Unitrust

- Charitable Remainder Annuity Trust

- Private Foundation: It sounds pretty cool, but unless you have $$$ Millions to donate to your Foundation, there may be more cost effective options for you (like the Donor Advised Fund above).


I hope you enjoyed this months newsletter. If you have any questions about planning or investing feel free to drop me an email:

James A. Daniel, CFP


Disclaimer: this information is for general purposes and should not be considered tax advice. Talk with your accountant and/or advisor before implementing!

© 2011 The Advisory Firm. All Rights Reserved.


The Advisory Firm, LLC provides fee-only financial planning services for clients throughout metro Atlanta and North Georgia including the communities
of Alpharetta, Canton, Cumming, Dawsonville, Duluth, Dunwoody, Marietta, Midtown, Roswell, and Woodstock.

This newsletter if for informational purposes only. The information contained within should not be considered as financial advice nor soliciation
for financial services. Consult with your financial professional if you have any questions. The Advisory Firm, LLC is a fee-only financial planning company and registered investment advisor.