Seven Tax Moves To Make Before 2013 Ends

• The top tax rate on ordinary income, including short-term gains from securities sales, increased from 35% to 39.6% for joint filers earning more than $500,000 ($400,000 for single-filers).
• For investors in those income categories, the top tax rate on long-term capital gains and qualified dividends rose from 15% to 20%.
• A new 3.8% Medicare surtax applies to the lesser of your net investment income (NII) or your modified adjusted gross income (MAGI) that exceeded $200,000 for single filers and $250,000 for joint filers.

The highest income-earners could face an effective top tax rate of 43.4% —the combination of the top income tax bracket and the Medicare surtax. If it’s any comfort, the “real” after-inflation tax rate on income had been much higher in the 1960s.

But high-income individuals don’t need to just stand there and take a walloping. You may be able to reduce your tax bill for 2013 and beyond with these seven moves.

1. Harvest capital losses. If you’re showing a net capital gain from securities sales earlier in the year, you could “harvest” capital losses now to offset those gains, plus up to $3,000 of ordinary income (see #6). Losses beyond that limit can be carried over to future tax years. Look over your portfolio to see which of the holdings showing a loss may be ripe for year-end harvesting. Note that this move also reduces NII and MAGI for purposes of the 3.8% surtax.

2. Absorb capital gains. But what if you’re already in the red for investment sales during 2013? Capital gains you realize now could be absorbed up to the amount of the loss. Just keep in mind that you need to distinguish between short- and long-term gains and losses. Gains or losses you take on securities you’ve held for a year or less are considered short term, and short-term gains are taxed at regular income rates. Normally, you won’t want to realize a long-term gain to offset a short-term loss.

3. Consider a Roth IRA conversion. This move is likely to increase this year’s taxes, not reduce them, because the amount you convert from a traditional IRA to a Roth IRA is taxed at ordinary income rates. But it still could be worthwhile, because later “qualified” distributions from the Roth likely won’t be taxed at all. Note that the value of the assets is fixed on the date of the conversion, but if the value subsequently drops, you can choose to “recharacterize” the Roth as a traditional IRA at tax return time.

4. Don’t forget about RMDs. If you’re over age 70 ½, you’re generally obligated to take “required minimum distributions” (RMDs) from traditional 401(k)s, IRAs, and other tax-deferred retirement plans. The amount you must take is based on your life expectancy according to IRS tables. And while this move, too, could increase your taxes for 2013, neglecting the rule could be much worse—resulting in a penalty of 50% of the amount you should have taken.

5. Shift income to the younger generation. If other family members are in a lower income tax bracket than you are, you might save by transferring income-producing property to them. For instance, if you gave a child non-voting stock in a business you own, the income generated by those shares may be taxed at the child’s lower rate. However, under the “kiddie tax,” unearned income of more than $2,000 received by a dependent child in 2013 generally is taxed at the parents’ top tax rate. Such transfers also may be subject to federal gift tax (see #7).

6. Sidestep the wash sale rule. Harvesting capital losses or gains could make you fall into this tax trap. The wash sale rule prohibits you from deducting a loss on a securities sale if you reacquire a substantially identical investment within 30 days of the sale. You could wait 31 days to reacquire the securities, or you might “double up,” buying a new block of the same securities and then waiting at least 31 days to sell the original shares. Give yourself enough time to maneuver at year-end.

7. Give gifts to family members. Under the annual gift tax exclusion, you can give each member of your family assets valued up to $14,000 in 2013 (up from $13,000 in 2012) without paying any gift tax. Joint gifts by a married couple can be twice as large. One advantage of such gifts is that they let you systematically reduce the size of your taxable estate.