One strategy to consider is selling appreciated securities with a low basis and buying them back right away -- in effect, capturing the gain thus far at a much lower rate and establishing a new, higher-cost basis for the future growth of those securities. (Because you are triggering a gain, not a loss, the wash sale rule -- which bans recognition of losses when you purchase a substantially identical security within 30 days before or after the sale -- would not apply).
Opportunity #2: Think about rebalancing your portfolio in tax-savvy ways. "Review your portfolio's asset allocation with an eye toward increasing investments in growth assets for greater capital appreciation and decreasing investments in dividend-payers," says Bagoff. "The reduction in dividend income may reduce your exposure to the unearned income tax and the recognition of income on the appreciation of a security is deferred until sold."
If it aligns with your long-term portfolio strategy, Bagoff also recommends considering a shift into tax-exempt income with municipal bonds because tax-exempt interest income from municipals will not be subject to the 3.8% surtax. Again, while portfolio tax management is important, it should not be the primary factor in your overall asset allocation. Talk to your financial and tax counselors before making any decisions.
Opportunity #3: Look into Roth IRA conversions. Beginning in 2010, the income limitation for converting to a Roth was eliminated, making this an option available to high-income taxpayers. There are a multitude of advantages with a Roth, where contributions are made with after-tax dollars: Earnings grow tax-free; qualified distributions are tax-free; and there are no required minimum distributions. "Because the full amount that's converted is taxed as ordinary income at rates in effect on the date of conversion," Bagoff explains, "if you think you might be a good candidate for conversion, this is a move to make in 2012, before ordinary income tax rates go up." He cautions, however: "Be sure you have sufficient assets outside your IRA to pay the tax that's due on the conversion."
Opportunity #4: Defer losses and deductions. "If you're anticipating having significant net realized capital gains in 2013, consider deferring recognition of capital losses to offset those gains," Bagoff advises. "That way, you're more likely to stay under the threshold and avoid being subject to the higher Medicare tax on unearned income."
Opportunity #5: Accelerate income. Self-employed business owners may want to try to accelerate the receipt of commissions, bonuses, or the exercising of nonqualified stock options in 2012 for themselves and their spouses. As always, first discuss income acceleration with your tax advisor before making any decisions. "You need to consider how the increased income might impact the amount and eligibility for certain tax credits as well as your exposure to the alternative minimum tax," Bagoff advises.
Opportunity #6: Establish and prepare to fund certain retirement plans. Many self-employed physicians have set up retirement plans, such as a simplified employee pension (SEP) IRA or solo 401(k). "If you have not yet established a solo 401(k), it must be done before the end of the year in which the deduction will take place. Alternatively, a SEP can be established and funded by the filing date of an individual tax return, including extensions," Bagoff explains. "This would lower your MAGI to help you stay below the threshold, so you won't be subject to the 3.8% Medicare surtax. The contributions will, of course, also lower your income, reducing your ordinary income tax."
Opportunity #7: Consider donating appreciated securities rather than cash to a charitable organization. "By donating appreciated securities in lieu of selling the securities and giving cash," says Bagoff, "you'll avoid being subject to the higher capital gains tax on the sale and will be entitled to a charitable contribution equal to the fair market value of the securities donated."
Opportunity #8: Prepare for rising estate taxes. There are a variety of trusts that can be established and gifting strategies that can be employed that will remove considerable assets from your taxable estate. "My best advice when it comes to minimizing estate and inheritances taxes and protecting assets is to consult your tax advisor and an estate-planning attorney," says Bagoff. "This important but complex area requires the guidance of experts who are intimately familiar with the law as well as your individual situation and objectives."
(Authored by Marcy Tolkoff, JD)
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