Critical Tax Issues That MUST Be Addressed In 2012

With an increased concern over tax rates, there is compelling need to protect what may be for many individuals their largest single asset: their retirement plans. The author outlines critical decisions that she says must be made before January 1, 2013 as they relate to tax implications in planning for retirement.

We have a complex tax system that most believe will get even more complicated in the near future. Our unprecedented national debt, over $16 trillion, along with considerable fear about the unfunded liabilities for Social Security and Medicare, make most financial advisors believe next year will be just the start of higher taxes. In fact, this very issue was a key topic of discussion at the Ed Slott semi-annual meeting for Master Elite Advisors, which I just attended.  The consensus opinion among this select group of financial advisors is that today more than ever, consumers need to be educated on the benefits of proactive tax planning.

With an increased concern over rising tax rates, now more than ever, there is a compelling need to preserve what may be for many their largest single asset, their retirement plans. Specifically, their tax deferred retirement accounts, like IRA’s, 401(k)’s, TSP, 457 deferred compensation plans, 403(b)’s, SEP, and Simple IRA plans. Because distributions from these accounts are subject to ordinary income tax rates, they qualify for few if any tax breaks, and generally fare the worst in a rising tax environment!

These are some of the critical decisions you make want to take action on before January 1, 2013


Opportunities to reduce future taxes:

  • Reducing exposure to the 3.8% tax on investment income.
  • Accelerating income in 2012. (This is inverse planning to what your average CPA typically recommends).
  • Deferring some deductions to 2013. (Again, inverse planning).
  • Consider the advantages of the current capital gains at 15%. Tax on dividend income is projected to go from a top tax rate of 15% in 2012 to 43.4% in 2013. That’s an increase of 189 percent!
  • Consider Roth Conversions which need to be done by year end! This can help you avoid the 3.8% surtax and will allow you to pay at the 2012 tax rates.

Back in 2010, I wrote an article: “Just Like Milk, Roth Conversions have an Expiration Date” Who would have known we would have another opportunity to take advantage of Roth conversions again, just two years later?


Every Estate Plan will need to be reviewed and possibly REVISED. Here are some key issues you want to be aware of:

  • The $5,120,000 estate tax exemption ($10,240,000 for couples) for 2012 and a 35% estate tax rate will go to $1,000,000 after year end and a 55% estate tax rate.
  • It is essential that you update your wills.  Be aware of what property will pass through your wills. For example, joint property and property with named beneficiaries like IRA’s, TSP, and life insurance does not pass through a will.
  • Disclaimer planning – due to the uncertainty of what the future estate tax law might be when a person dies.
  • Estate plans for many may be simplified with the large exemption, at least for 2012, but watch out for state estate tax exemptions which may be much lower.
  • Family problems or issues – for example, new in-laws, a divorce, remarriage, executers or trustees who are now deceased or incapacitated (or no longer needed), beneficiaries to be excluded or included, children or grandchildren reaching the age of majority, an illness or other life changes since the planning was last done.
  • Unmarried couples or same sex married couples – no marital deduction available (however this is being tested in the courts – Defense of Marriage Act – DOMA). But they can use the 5 million estate exemption, for 2012 anyway.
  • Portability issues – this is scheduled to end after 2012, but it seems likely that this popular provision will be reinstated in a future tax bill.


Are you using the gift tax exemption?  If you don’t use them now, they may be lost or cut back after 2012.  Key issues:

  • A $5,120 million/$10,240 million gift exemption for 2012 – Use It or Lose It . The gift tax exemption is scheduled to go down in 2013. (The gift exemption, like the estate exemption is PORTABLE.)
  • Gifting removes property from the estate, along with appreciation and income on that property.
  • Consider gifting property that would be exposed to high investment taxes in 2013.
  • The three tiers of tax-exempt gifting:
  1. $13,000 annual exclusion ($26,000 for couples).
  2. Unlimited gifts direct to medical providers or for tuition.
  3. $5 / $10 million gift exemption (back to $1 million after 2012)
  • 529 Plans can utilize 5 year gifting ($13,000 x 5 = $65,000 per person or $130,000 if the spouse also contributes).

For any of you that have attended my workshops or read my articles on, you know that one of my mottos is: The “Yo-Yo Retirement Program” (You’re on Your Own), which is for most of us what our retirement plan defaults to, AKA, you are responsible for yourself.

There are tax strategies that allow people to create tax-deferred and even tax-free wealth for themselves and their families, but these are largely unknown by consumers.  According to Ed Slott, nationally recognized IRA – distribution expert, “The average financial advisor is not a distribution expert and cannot completely address these issues. In fact much less than 1% are”. Ed Slott believes retirement funds are lost to excessive taxation.

  • This material is provided for general and educational purposes only and is not intended as tax, legal or investment advice [or for use to avoid penalties that may be imposed under U.S. Federal tax laws].  Please consult your tax advisor for advice regarding your personal tax situation.
  • Conversion from a traditional IRA to a Roth first requires paying taxes on any pre-tax contributions, plus any gains.  Additionally, the money used to pay these taxes cannot come from your traditional IRA without a 10% penalty, if you are under age 59-1/2.
  • Converted amounts can be distributed without penalty after five years, beginning January 1, of the year of conversion and ending on December 31, of the fifth year.  Each conversion has a separate five-year holding period.  If you are under 59-1/2 and take a distribution of converted amounts prior to the five-year holding period you may be subject to the 10 percent premature penalty.  Distribution of earnings before completing a five-year holding period and attaining age 59-1/2 may be subject to tax and 10 percent penalty.

About the Author

Carol Schmidlin, Certified Financial Fiduciary®, MRFC® is the President of Franklin Planning and has been advising clients on how to grow and preserve their wealth for 25 years. In addition to her financial planning practice, she is the founder of FedSavvy® Educational Solutions, which provides Financial and Retirement Literacy Programs for Federal Employees. She is passionate about helping families with all phases of Wealth Management and is a member of Ed Slott’s Master Elite IRA Advisor Group. Her practice maintains a home office in Sewell, NJ along with a satellite office in Washington, DC. Carol can be reached at (856) 401-1101.