While taxes may be ever in flux and uncertain, we can still get ahead and plan accordingly, using what we know today.

From a historic standpoint, we know the current tax environment (meaning marginal tax rates, capital gains and dividend tax rates) is low. But in 2013, the top marginal rate is scheduled to go from 35 percent to 39.6 percent. The 15 percent rate for qualified dividends is set to expire, so dividends may be taxed as ordinary income and the capital gains tax may go from 15 percent to 23.8 percent.

The new tax that is fairly certain is the Medicare contribution tax. This is an additional 3.8 percent on the lesser of net investment income or excess modified adjusted gross income.

There is also a Medicare high income tax of .9 percent on certain incomes. While Congress has until December 31 to decide these questions, we are talking about possible strategies now:

1. Sell investments with gains, real estate and other assets that would trigger capital gains. If you have losses, consider harvesting these at year end to offset 2013 capital gains rates, which may be higher.

2. Move money into investments and accounts not affected by higher taxes, such as municipal bonds, Roth IRAs, 529 college savings plans or tax-deferred annuities. Municipal securities are now yielding comparably with other taxable fixed income alternatives. A 3 percent municipal bond has a tax equivalent yield (TEY) of 4.6 percent for those in the highest tax bracket of 35 percent. With the new rates (39.6 percent federal and 3.8 percent Medicare tax), the same bond will have a TEY of 5.3 percent. This year may also be the time for a Roth IRA conversion.

3. Receive ordinary income from sources like IRAs and annuities, or consider exercising nonqualified employee stock options. These will allow you to take advantage of lower rates in 2012 vs. 2013. IRA and retirement income are not subject to the new Medicare contribution tax (net investment income) calculation. Work with your financial advisor and CPA to determine the best income distribution strategy.

4. Accelerate income, delay deductions or defer tax-deductible payments. Move income to 2012 and deductions to 2013. Defer deductible items to 2013, as they may be worth more if tax rates are higher.

5. Look at the composition of your non-qualified portfolios to determine if your portfolio should be made more tax efficient. Determining which asset classes and investments are appropriate in taxable accounts will become more important. The use of exchange-traded funds that are managed to be more tax efficient, or other alternative investments that have attractive yields and some tax benefits, are examples. Private REITs currently are yielding 5 percent to 6 percent, of which 40 percent to 50 percent is typically tax deferred. Master Limited Partnerships (MLPs) also have high current yields of 6 percent to 7 percent, and most of the dividend—80 percent or more—is tax deferred, with the remainder currently taxed as qualified dividends. When you sell a security, you will realize capital gains tax on the cost basis, which is reduced by the tax deferral.

While many of these issues may change between now and year’s end, it is prudent to look at your situation more closely, to see if any of these strategies should be implemented.

The information contained in this article is not intended to be a “Covered Opinion” under Treasury Department Circular 230. If the information is construed to be such an opinion, the opinion was written to support the promotion or marketing of the transaction(s) or matter(s) addressed in the opinion and the taxpayer should seek advice based on his or her particular circumstances from an independent tax advisor. Furthermore, the opinion does not reach a conclusion at a confidence level of at least more likely thannot with respect to one or more significant federal tax issues addressed by the opinion. In addition, with respect to those significant federal tax issues, the opinion was not written, and cannot be used by, the taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer. The partners of Heritage Financial Consultants, LLC are registered representatives of Lincoln Financial Advisors, Corp., a broker/dealer (Member SIPC) and a registered investment advisor. Heritage Financial Consultants, LLC is not an affiliate of Lincoln Financial Advisors Group. Lincoln Financial Advisors Corp does not provide legal or tax advice. CRN201210-2072618