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Decisions tricky in shadow of 'cliff'

| Sunday, Dec. 9, 2012, 8:54 p.m.

There are mere weeks left to maneuver so you keep as much of your money as possible without overpaying taxes for 2012.

But this is no typical year. You are flying blind as Congress dawdles over the actions it must take by Dec. 31 to avoid tax increases in 2013 for virtually all taxpayers. Since you don't know whether Congress will save you from a tax increase, or let your taxes go up on Jan. 1, any tax move you make before the end of this year may turn out to be less than optimal later.

The reason, of course, is the “fiscal cliff,” or the popular way of talking lately about billions in tax increases that will raise the average middle-class household's taxes by $2,200 next year if Congress doesn't step up.

In other words, even a married couple with an income of $17,400 or less will no longer be in the 10 percent tax bracket. Instead, they will be bumped up to 15 percent and have to pay more than they do now. Likewise, if you have been in the 10 percent or 15 percent tax brackets, and paying nothing for capital gains on the stocks, bonds, real estate or other investments that provide your retirement income, you will start paying 15 percent on those gains. The highest earners will have to pay 23.8 percent.

If you have been enjoying relief on college tuition, that gets ratcheted down. Dividend taxes will start going up too. Lowest-income taxpayers will face a 15 percent rate, while those at the highest income will face 43.4 percent.

So what's an individual to do?

Tax advisers are telling many people — especially the wealthy — to take the income in 2012 when taxes might be lower. Then, in 2013, try to take as many deductions as possible to whittle down the tax bill. Of course, that plan could go awry too if Congress gets into the “loophole-closing” that's been discussed.

Under some plans, you could lose some or all of your mortgage deduction, your deduction for charitable contributions, and even the deduction for contributions to your 401(k) plan.

Because of the potential, advisers are suggesting that people consider taking some capital gains this year if it makes sense based on the investment., rather than taking the gain next year when it will be more costly at tax time.

Financial planner Francine Duke, of Vernon Hills, Ill., has had clients sell some dividend paying stocks that they've owned for more than a year in taxable accounts, and buy them back in IRAs instead. If someone earns dividends in IRAs, they aren't taxed.

Still, before selling investments and playing with deductions, advisers say people should make sure they do not accidentally force themselves into a tax mess — possibly by pushing themselves into the alternative minimum tax (AMT) for 2012. The AMT is a higher tax than regular taxes.

Certain deductions that can be helpful in keeping tax bills low are worthless if you are in the AMT, such as deductions for paying state income taxes, property taxes or mortgage interest.

Best advice? Think twice before actions that could give you a major tax bill this year.

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