Year-end planning is a bigger challenge this year than in past
years because, unless Congress acts, tax rates will go up next year, many more
individuals will be snared by the alternative minimum tax (AMT), and various deductions
and other tax breaks will be unavailable. To be more specific, as a result of expiring Bush-era tax cuts,
unless Congress ascts, individuals will face higher tax rates next year on
their income, including capital gains and dividends, and estate tax rates will
be higher as well. The AMT problem arises because, for 2012, AMT exemptions
have dropped and fewer personal credits can be used to offset the AMT.
Additionally, a number of other tax provisions expired at the end of 2011 or
will expire at the end of 2012. Rules that expired at the end of 2011 include,
for example, the research credit for businesses, the election to take an
itemized deduction for State and local general sales taxes instead of the
itemized deduction permitted for State and local income taxes, and the
above-the-line deduction for qualified tuition expenses. Rules that will expire
at the end of this year include generous bonus depreciation allowances and
expensing allowances for business, and expanded tax credits for higher education
costs.
These adverse tax consequences are by no means a certainty.
Congress could extend the Bush-era tax cuts for some or all taxpayers,
retroactively "patch" the AMT for 2012 to increase exemptions and
availability of credits, revive some favorable tax rules that have expired, and
extend those that are slated to expire at the end of this year. Which actions
Congress will take remains to seen and may well depend on the outcome of the
elections. While these uncertainties make year-end tax planning more
challenging than in prior years, they should not be an excuse for inaction.
Indeed, the almost certain prospect of some higher taxes next year makes
it even more important to engage in year-end planning this year. To that end,
we have compiled a checklist of actions that may help you save tax dollars if
you act before year-end. Many of these moves may benefit you regardless of what
Congress does on the major tax questions of the day. Not all actions will apply
in your particular situation.
We can narrow down the specific actions that you can take once we
meet with you to tailor a particular plan. In the meantime, please review the
following list and contact us at your earliest convenience so that we can
advise you on which tax-saving moves to make. We also should schedule a
follow-up for later this year to see whether the November election results will
require changes to year-end planning strategies.
Year-End Tax Planning Moves for
Individuals
(1) Realize losses on stock while substantially
preserving your investment position. There are several ways this can be done. For example, you can
sell the original holding, then buy back the same securities at least 31 days
later. It would be advisable for us to meet to discuss year-end trades you
should consider making.
(2) If you are thinking of selling assets that
are likely to yield large gains, such as inherited, valuable stock, or a
vacation home in a desirable resort area, try to make the sale before year-end,
with due regard for market conditions. This year, long-term capital gains are taxed at a maximum rate of
15%, but the rate could well be higher next year as noted above. And if your
adjusted gross income (as specially modified) exceeds certain limits ($250,000
for joint filers or surviving spouses, $125,000 for a married individual filing
a separate return, and $200,000 for all others), gains taken next year (along
with other types of unearned income, such as dividends and interest) will be
exposed to an extra 3.8% tax (the so-called "unearned income Medicare
contribution tax").
(3) Make gifts sheltered by the annual gift tax
exclusion before the end of the year and thereby save gift and estate taxes.You can give $13,000 in 2012 to each of an unlimited number
of individuals but you can't carry over unused exclusions from one year to the
next. The transfers also may save family income taxes where income-earning
property is given to family members in lower income tax brackets who are not
subject to the kiddie tax. Savings for next year could be even greater if rates
go up and/or the income from the transfer would have been subject to the 3.8%
tax in the hands of the donor.
Year-End Moves for Business Owners
(1) If your business is incorporated, consider
taking money out of the business by way of a stock redemption if you are in the
position to do so. The buy-back of the
stock may yield long-term capital gain or a dividend, depending on a variety of
factors. But either way, you'll be taxed at a maximum rate of only 15% if you
act this year. If you wait until next year to make your move, your long-term
gains or dividends may be taxed at a higher rate if reform plans are instituted
or the Bush-era tax cuts expire. And if your adjusted gross income (as
specially modified) exceeds certain limits ($250,000 for joint filers or
surviving spouses, $125,000 for a married individual filing a separate return,
and $200,000 for all others), gains taken next year (along with other types of
unearned income, such as dividends and interest) will be exposed to an extra
3.8% tax (the so-called "unearned income Medicare contribution tax").
Keep in mind that you will need expert help to plan and execute an effective
pre-2013 corporate distribution.
(2) Set up a self-employed retirement plan if
you are self-employed and haven't done so yet.
(3) Increase your basis in a partnership or S
corporation if doing so will enable you to deduct a loss from it for this year. A partner's share of
partnership losses is deductible only to the extent of his partnership basis as
of the end of the partnership year in which the loss occurs. An S corporation
shareholder can deduct his pro rata share of an S corporation's losses only to
the extent of the total of his basis in (a) his S corporation stock, and (b)
debt owed to him by the S corporation.
