Tax provisions in the American Taxpayer Relief Act

The American Taxpayer Relief Act, passed by Congress on January 1, 2013, contains many far-reaching tax provisions. In addition to extending many tax items that had expired or were due to expire, the act also made permanent many provisions of previous tax acts. The tax features of this act are too numerous to list here, but the most comprehensive description of these changes I have found is this Journal of Accountancy article.

I highly recommend you read this article or consult a qualified tax professional to assess the impact of this act on your personal situation.

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2013 retirement contribution limits

As we near the end of 2012, it’s time to start thinking about your finances for 2013. While some year-end planning might still be needed, it’s not too early to start thinking about next year. Many employers will start having their open enrollment periods over the next few weeks, and this is a great time to review your retirement plan contributions.

The new 2013 retirement contribution limits are as follows:

  • The elective deferral contribution limit for 401(k), 403(b) and most 457 plans increased to $17,500 from $17,000 in 2012.
  • The catch-up contribution limit for employees aged 50 and older into those same plans remains unchanged at $5,500 for 2013.
  • The maximum total contributions into a defined contribution plan rise to $51,000 for 2013 compared to $50,000 for 2012. For those aged 50 and older, the limit is $56,500.
  • If you participate in a Simple IRA plan, the salary reduction contribution limit increases to $12,000 in 2013, up from $11,500 in 2012. The catch-up contribution remains at $2,500.
  • The limit for IRA and Roth contributions increased to $5,500 from $5,000 in 2012. The catch-up contribution remains at $1,000 for 2013.
  • For traditional IRAs, there are a few different scenarios where different income limitations apply. These income limits increased from years prior and need to be looked at in more detail for each specific situation.
  • For Roth IRAs, the AGI phase out range is $178k-$188k for married couples filing jointly. For single and heads of households, the phase-out range is $112,000-$127,000.

If you’d like to learn more, you can read the IRS press release here.

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Hedging higher tax rates with Roth conversions

With the Bush-era tax cuts set to expire at the end of 2012, many investors are seeking ways to hedge against a potential increase in tax rates for 2013 and beyond. One option that should not be overlooked is the use of Roth conversions.

A Roth conversion allows you to pay tax on the converted IRA assets now, with those assets then growing tax-free for the rest of your life. It is generally preferable to defer taxes for as long as possible, but in a situation where tax rates may increase in the future, it may be worth locking in the taxes at today’s rates. For example, the top tax rate in 2012 is 35%; In 2013, the top tax rate may be as high as 43.4% (39.6% top marginal rate plus the 3.8% “Medicare surtax”). If tax rates don’t increase, you can always undo the conversion by recharacterizing the Roth back to a traditional IRA. As long as a recharacterization is done by the extended due date of the tax return (October 15th), you’ll just be back to where you started.

It is also important to recognize that a Roth conversion may bump you up into a higher tax bracket in the year of the conversion, depending on the amount converted. In that case, you should consider a partial conversion, where you only convert enough to stay within your current tax bracket. This is where the assistance of a tax professional can be invaluable.

Everyone’s situation is different, and whether a Roth conversion makes sense for you will depend on your particular circumstances and desires. Your financial advisor and CPA can help you weigh the costs and benefits of such a strategy to determine if it is right for you.

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Year-end tax planning

Our friends at Thomson Reuters have provided another wonderful checklist of year-end tax planning opportunities. As we enter the final week of the year, it’s worth considering if any of these options can save you money. (more…)

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Expiring Tax Provisions

It seems like every year there’s a slew of tax breaks in danger of expiring.  Sometimes Congress extends the tax break, other times they actually expire and fall by the wayside. 2011 is no different, with 3 potentially useful tax breaks on the cutting room table.  Those who may be able to benefit from these tax breaks should consider taking advantage of them soon, before it’s too late.

  • Sales Tax Deduction – Individuals who itemize their deductions can elect to deduct their sales tax or their state and local income taxes, whichever is greater.  There are seven states without a state income tax, so those residents would surely elect the sales tax deduction.  Residents of other states may find that they paid very little in state income taxes and may decide to elect the sales tax deduction instead.  For those who are taking the sales tax deduction and considering a large purchase, such as a new car, it may be worthwhile to complete the purchase this year in order to maximize this tax benefit while it’s still available.
  • Energy Efficiency Credit – Individuals can take a credit of up to $500 for making energy efficient improvements to their homes, including upgrades for roofs, doors, insulation, windows, furnaces, air conditioners, and many others.  There are limitations on the amount of eligible credit for the various improvements, and you can find a list of those here. It’s also important to note that unlike many other credits, this one is a lifetime credit–so if you’ve utilized all of the $500 credit in the past, you cannot take any more regardless of your qualified expenditures now.  However, if you haven’t benefited from this tax break yet, and are considering making energy efficient improvements to your home, you may want to do so before year end.
  • Qualified Charitable Distributions from IRAs – Individuals older than 70 ½ can make tax-free distributions from their IRA to qualified charities.  The distribution is not includable in the donor’s income, but it is not deductible as a charitable donation either.  This provision primarily benefits individuals who are charitably inclined but don’t have enough deductions to itemize.  The qualified charitable distributions will count towards an individual’s required minimum distribution (RMD) for the year, allowing those who don’t need the money from their IRA to donate it without being taxed on it.  With year-end fast approaching, individuals who have yet to take their RMD may want to consider this option.

Each of the tax breaks above had been due to expire at some point in the past but was subsequently extended at the last minute.  It is possible that Congress will extend these breaks again, but nothing is certain given the deficit and debt problems currently facing our country.

If you think you may benefit from any of these tax breaks, please be sure to consult with your accountant to see how these tax savings may apply to your specific situation.

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RMDs and Charitable contributions

If you have IRA accounts and are over age 70 ½, then you probably know about the Required Minimum Distribution (RMD) rules. These IRS rules require you to take money out of your retirement accounts each year, whether you need the money or not.

This money could be spent or re-invested back into a taxable investment account to allow it to continue to grow. Some people deposit this money to their checking account, and eventually use it to make a charitable contribution to the charity of their choice.

Fortunately, the government recently extended a provision through 2011, which allows individuals over age 70 ½ to exclude up to $100,000 from their gross income if it is paid directly from an IRA to a qualified charity. In addition, that excluded amount can be used to satisfy the RMD for the year.

This could potentially be a much more tax-efficient way to make charitable contributions than by depositing the RMD amount in your bank account and then writing a check for charity. If you’re a Merriman client, we can help you complete the paperwork accordingly, just give us a call.

To find out more information on this valuable topic, please discuss with your CPA or read this article from the IRS.

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A refresher on capital gains and losses

This time of year, most of us are thinking about taxes.  But with Congress frequently changing the tax law, it’s not always easy to remember how specific rules are applied.  Fortunately, the IRS has published a recent list of tax tips relating to capital gains and losses to help remind us of some of those rules.  You can check out the list here.

It’s a great refresher for all of us!

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Traditional vs Roth 401(k)

Do you have the Roth 401(k) option available to you?  If so, it may be worth looking into.  The following table compares the features of a Roth 401(k) to those of a traditional 401(k).

Traditional 401(k)Roth 401(k)
Annual contribution limit$16,500 ($22,000 for participants age 50 and above)$16,500 ($22,000 for participants age 50 and above)
Matching contributionsAllowed. May be combined with employee contributionsDeposited separately in a Traditional 401(k) account. Taxed when withdrawn
Tax status – employee contributionsMade with pre-tax dollars; deductible from current incomeMade with after-tax dollars; not deductible from current income
Tax status – withdrawals after age 59½Taxable as ordinary incomeNot taxable
Mandatory withdrawalsRequired minimum distributions start at age 70½Required minimum distributions start at age 70½
Best for


Employees who need the current tax deduction, who will make withdrawals within five years, or who will be in same or lower tax bracket in retirementEmployees who do not need the current tax deduction, who will not make withdrawals for five years or more, or who will be in higher tax bracket in retirement
ConcernsAll growth in the account, including capital gains on equity investments that would qualify for favorable capital-gains treatment if earned outside a retirement account, are taxed at ordinary income ratesIf tax rates decline, early payment of taxes will have been counter-productive; requires giving up more current income to maximize employer match

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Investing around mutual fund distributions

I have liquid assets that I want to invest in Vanguard Funds using your diversification strategy. Many of the funds pay out dividends at the end of December. My money is sitting in the bank right now. Is it better to wait until January to invest after the dividends are paid, or is now far enough ahead that the dividends won’t create a penalty?


If your time frame is from now to the end of the year, there is no way to know now whether you should invest at all. If markets go down between now and December 31, you are better off with money in the bank. If markets go up, you are better off investing.

(more…)

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It’s not too late to consider a Roth conversion

The end of the year is a busy time for most of us. Don’t forget to consider whether the Roth conversion might be worth your while. This year’s deadline, December 31st, is quickly approaching.

The income limitations to convert to a Roth have been repealed for this year and beyond, so anyone with an IRA is now eligible. Also, don’t forget that for 2010 conversions only, you have the option of recognizing the conversion income in the subsequent two years (2011 and 2012). This allows you to receive the benefits of a Roth IRA immediately while delaying the tax hit for a few years.

If you convert now and later change your mind, you can “undo” the conversion with a recharacterization—so you are not necessarily locked into the conversion if you do it this year. You have until the extended due date of your tax return (i.e. October 17, 2011) to recharacterize the conversion if you change your mind.

You may consider doing partial conversions—converting just enough each year to use up the rest of a particular tax bracket, like the 15% or 25% tier. Although this requires more work and planning each year, it’s a great way to gradually gain Roth exposure while sensibly controlling the tax impact.

Your financial advisor or CPA can help you decide if a Roth conversion is right for you. You can also find more information on the pros and cons of a Roth conversion in my article “Roth IRAs: To convert or not to convert.”

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