For tax year 2012, you may be able to take advantage of lower income tax rates and more generous tax benefits than those you may face in 2013. A variety of tax breaks are scheduled to sunset or expire as of Jan. 1, 2013, unless Congress takes action. While you have the chance, consider making the most of the following.
Lower Income Tax Rates
The current tax rates (10%, 15%, 25%, 28%, 33% and 35%) may be replaced with the higher rates (15%, 28%, 31%, 36% and 39.6%) that were in effect before tax cuts were signed into law in 2001 and 2003.
If possible, you may want to consider shifting income you would otherwise receive in 2013 into 2012. Depending on your circumstances, this might involve billing earlier (if you do freelance work, for example), selling appreciated property and accelerating bonuses. Another option would be to defer deductible expenses until 2013 to help offset income that may be subject to a higher tax rate at that time. Tip: Stay abreast of the news. Congress has passed or extended tax legislation at the very end of the year for the past few years.
Lower Capital Gains and Dividend Tax Rates
Currently, qualified long-term capital gains (gains on assets held more than one year) and dividends are taxed at 15% (0% for taxpayers in the lowest two income tax brackets). The rate may rise in 2013 to 20% (10% for those in the lower income tax brackets). Qualified dividends are currently taxed at the same rate as qualified capital gains. Next year they may be taxed at (higher) ordinary income tax rates. Tip: You may wish to sell capital assets before year's end. Identical assets can be repurchased immediately, with a new tax basis established in the amount of the purchase price.
Coverdell Education Savings Accounts (ESAs)
The maximum annual contribution for these tax-advantaged vehicles may be reduced from $2,000 to $500. ESAs can be used tax-free to pay qualifying elementary, second and post-secondary education expenses. So you may want to take advantage of the full $2,000 contribution ceiling this year. Tip: If the original beneficiary does not use the money, transfers to members of the beneficiary's family are permitted.
Standard Deduction for Married Couples
So-called "marriage penalty" relief may end in 2012, resulting in the standard deduction for married couples falling from its current level of 200% of the deduction for single individuals to 167% of that amount. Tip: If you're married and take the standard deduction, consider pushing deductible expenses into 2013, if you think it may allow you to save by itemizing deductions next year.
Tax laws are complex and change frequently, so always consult your tax advisor before making moves that will affect your tax situation.