Tax Planning

2012 is a very important year for tax planning!  If you have never planned for taxes (or how to minimize them), you should consider doing so this year.
Why is 2012 such a special year for planning?  We know that the “Bush” tax cuts that were extended for two years will sunset on 12/31/2012, and with the current economy and government deficit situation one can certainly surmise that tax rates will go anywhere but down.
Let’s take capital gain rates as our first planning point.  Currently, you can sell capital assets that you have owned for more than one year and only pay tax at a rate of 15%.  If you have dividend income from investments that you have owned more than one year, you are also lucky enough to only pay tax on that dividend income at the 15% rate.  Starting in 2013, the 15% rate goes away.  We do not know if the new rate will be 20% or the regular marginal tax rate, but we suspect that it will be higher than the current 15%.  Do you have a closely held business that currently pays dividends to you?  This may be a good year to take some additional dividend income from that closely held business.  Do you have highly appreciated assets that you are considering selling?  Selling before the end of 2012 may be a solution for you.  You might even consider harvesting gains by selling an investment and repurchasing it.
A typical tax planning strategy is to defer income to a future year and accelerate expenses into the current year.  When tax rates are expected to rise, you might consider doing just the opposite.  If you think your income will be higher or the same in 2013 than it is in 2012, and we expect the tax rates to be higher in 2013, you should consider moving income into 2012 and pushing expenses into 2013.  How does one move income and expenses from one year to another?  If you have a business and are on the cash basis of accounting, you can defer paying bills until January of 2013.  You can accelerate billing clients and step up collection practices to get income into 2012.  As an individual, you can postpone charitable contributions until January 2013.   There are other methods of deferring expenses and accelerating income that may work for you as well.
In addition to the increased marginal tax rates and increased long-term capital gain rates, there will be an additional Social Security tax of up to 3.8% percent on unearned income for taxpayers with adjusted gross income (AGI) of $250,000 or higher beginning in 2013.  This additional tax on unearned income will create a need for taxpayers to re-evaluate their portfolios to determine if investment income is creating income that is now subject to an additional 3.8% tax.  Because this additional tax is only on taxpayers with higher AGI, those that are close to the $250,000 mark may have an extra incentive to reduce their income in 2013.  Gifting investments to children in lower tax brackets might be a strategy to consider in this situation.
Other items that need to be considered when planning for taxes after 2012 include:
• Bonus depreciation will no longer be available for assets purchased after 2012, so planning is important for capital purchases before year end.
• Estate planning is also very important to do during 2012 since the $5,000,000 exemption will expire at the end of the year.
• Gifts of appreciated investments to charity can reduce adjusted gross income and increase deductions.
• Contributions to retirement plans can reduce current year income and defer it to a year when you expect your income to be lower (such as your retirement years).
• Taking advantage of tax credits that will expire before the end of the year.
These are just a few of the ideas we have to help you reduce your tax bill.  It is very important to talk to your CPA about your business and personal situation and how you can minimize taxes not only for the current year, but for future years.  2012 is the year for tax planning!
/Posted by Suzan Ross, CPA, PFS