Year-end tax changes, part 2: focus on your goals

It’s been two weeks after the election and it is only six weeks before the end of the year. But it still remains to be seen what tax changes Congress might make to address the combination of automatic spending cuts and tax increases included in the short-hand phrase “fiscal cliff.”

Taxpayers of course need to be prepared to make strategic decisions based on how these changes are likely to affect them. In the desire to responsive to changes, however, some financial advisers are concerned that their clients may precipitously and end up doing themselves more harm than good.

There are many specific areas where the tax code could be tweaked, depending on how the dynamics play out in Congress and between Congress and the Obama administration. Tax rates on capital gains could be increased. So could the tax rates on dividend income.

What about real estate? With the real estate market finally improving, more taxpayers may be in a position to sell their homes. If you have owned your home for a long time, it may even have appreciated in value, despite the slump of recent years.

If you are in this situation, keep in mind that appreciation on most home sales is never taxed. This is because there is a tax exemption for the first $250,000 of appreciation for a single taxpayer and $500,000 for couples.

In other words, as potentially momentous as the fiscal cliff is, it’s important to make sound financial decisions that make sense on their own terms – not just because they seem to have short-term tax advantages.

Ultimately, that is also a good way to avoid or resolve problems with the IRS as well. Keep monitoring tax changes and be prepared to respond, but also stay focused on your overriding goals and objectives.

Source: “More Costly Than Higher Taxes: Rash Decisions,” New York Times, Paul Sullivan, 11-16-12

Our firm handles situations similar to those discussed in this post. To learn more about our practice, please visit our IRS tax litigation page.