Due to the uncertainty over future tax rates for individuals and businesses, Daszkal Bolton has compiled a mid-year list of top tax areas taxpayers should be considering that might help put them in a better position when filing their tax returns next April.
Many taxpayers will be impacted by higher taxes and significant changes when they file for 2012 and would benefit from spending some time this summer reviewing their tax profiles and girding for possible shifts in the tax landscape over the next 2 years. The Bush tax credits sunset if the “Tax Extenders” bills are not passed, the new Affordable Care Act tax provisions kick in for 2014, and a new President may set the stage for a major Tax Code revision!
If certain provisions are not made by December 31, 2012, possible scenarios could include the loss of deductions such as the educator’s expense deduction, the tuition and fees deduction and the sales tax deduction. In addition, the Alternative Minimum Tax is currently expected to increase taxes on more than 20 million taxpayers. Other considerations include the reinstatement of the marriage penalty and possible increases in capital gains.
Here are some items to consider:
You may want to accelerate taxable income into 2012 or defer to 2013. Businesses can defer taxable income to the following year, by sending out invoices late in the year or postponing some deductible expenses. But this approach is only useful if you expect to pay a lower tax rate next year, and with the Bush tax cuts scheduled to expire at year end, many businesses and individuals may find themselves paying higher rates in 2013. If this is the case, then it may be more beneficial to accelerate some taxable income into this year so that it can be taxed at the lower rate.
Consider giving some appreciated stock or mutual fund shares to loved ones. The 0% rate on investment income could be history by the end of the year. The tax rate on qualified dividends and long-term capital gains is currently 0% for those who fall within the 10 and 15% tax brackets. If your income is too high to qualify for this rate, consider giving some appreciated stock or mutual fund shares to loved ones who fall within the lower brackets (remember giving securities to anyone under age 24 could result in them being taxed at their parents’ rates).
Cut your losses to offset gains. Bite the bullet and sell securities currently worth less than you paid for them — before year end. The resulting capital losses will offset capital gains from other sales this year. Think about selling appreciated securities this year while the maximum tax rate on long-term capital gains from 2012 sales is only 15%. This rate applies to appreciated securities held for at least a year and a day before selling. If you’re thinking of giving away loser shares as gifts to relatives, you’re better off selling them and giving relatives the cash. This allows you to take advantage of the capital losses. It is (as noted above) beneficial to give away winner shares if recipients will pay lower tax rates than you would if you sold them. The same rules apply when it comes to giving shares to IRS-approved charities. You can save by selling loser shares and claiming the capital loss on your tax return, and then giving the cash proceeds to charity and claiming a charitable write-off.
Think about bunching. If your 2012 itemized deductions are likely to be just under—or just over—the standard deduction amount, you may consider bunching together some expenditures. For example, you could prepay your 2013 property taxes by December 31, 2012 and claim both the 2012 and 2013 property tax payments on your 2012 return. But if you think you’ll be paying a higher tax rate next year, you may want to claim the standard deduction this year and bunch your itemized deductions into 2013 where they can offset the higher taxed income.
Bonus depreciation and 179 can help you save on new and used equipment and software. Now might be the time to take advantage of the fact that Section 179 of the IRS tax code allows eligible businesses to claim first-year depreciation write-offs for new and used equipment and software. The maximum deduction is currently a generous $139,000, but it is set to drop to $25,000 next year. Above and beyond the Section 179 deduction, your business can also claim first-year bonus depreciation equal to 50 percent of the cost of most new equipment and software placed in service by December 31 of this year. This generous break will expire at year-end unless extended by Congress.
Estate and gift planning shouldn’t be overlooked. The unified federal gift and estate tax exemption for 2012 is a now $5.12 million, but scheduled to drop back to just $1 million in 2013. The maximum estate tax rate is also expected to rise starting next year — from 35 percent to 55 percent. Given the generous tax exemption and lower maximum tax rate, perhaps it is time to re-evaluate your estate and gift planning to take advantage of these tax breaks where possible.
Switch a Traditional IRA to a Roth IRA. If your Traditional IRA never recovered from the stock market meltdown a few years ago, then it’s probably worth much less than it once was. The tax hit from converting it to a Roth IRA now would also be less, and future income gains that accumulate in a Roth IRA will be free of federal income taxes. Traditional IRA distributions could be hit with tax rates even higher than today’s.
Take a look at the Alternative Minimum Tax. Some recent tax law changes have been helpful in reducing your regular taxes, but the odds are that you’ll owe the dreaded Alternative Minimum Tax. It’s imperative that you and your Daszkal Bolton account manager evaluate all tax planning strategies in light of the AMT rules before making any moves.
In addition to the top tax tips above, keep in mind that it’s sometimes beneficial in mid year to consider changing a withholding status —- for instance, if a child is born.
Contact Us: These ideas to reduce your taxes are just the tip of the tax iceberg! Timothy Devlin, CPA, Partner-in-Charge of Tax Services, has over 25 years of experience in public accounting, and assists clients in reducing their total tax liability, making tax-efficient investment decisions, and developing financial structures that provide maximum tax advantages. Please contact Tim if you would like a new perspective on ways to reduce your taxes. He can be reached at 561-367-1040 or [email protected].