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Year end tax planning

November 27, 2012 by Andy Graf
Copeland Buhl

Copeland Buhl & Company prefers to be proactive in tax planning with our clients. This year, planning is a bigger challenge because unless Congress acts, the Bush-era tax cuts expire at the end of 2012, meaning large tax increases for some clients. Among the changes scheduled to take effect in 2013 are:

  • Reinstatement of the 39.6% income tax bracket (up from the current maximum 35%)
  • Qualified dividends taxed at ordinary income tax rates (currently taxed at 15%)
  • Long-term capital gains taxed at 20% (currently taxed at 15%)
  • The estate tax exemption will reset back to $1,000,000 from the current amount of $5,120,000
  • The Patient Protection and Affordable Care Act (the new health care law commonly called Obamacare) tax provisions included a new 3.8% Medicare surtax on net investment income. This tax applies to clients who have modified adjusted gross incomes (MAGI) above:

            Category                                 MAGI Threshold

            Married Filing Jointly               $250,000

            Single                                      $200,000

            Married Filing Separately        $125,000

 

The tax rate (3.8%) is applied to the lesser of: (1) net investment income; or (2) the excess of MAGI over the MAGI thresholds above. The tax will also apply to certain estates and trusts.

 

This law also imposes an additional 0.9% Medicare tax on taxpayers earning wages in excess of the above thresholds.

 

Additionally, as the end of the year approaches, here are a few tax planning items to consider: 

  • Prepay business expenses before December 31 to accelerate the deduction to 2012 (for cash-basis taxpayers) if you expect your tax rates to stay the same or decrease in future years.
  • Defer recognition of income by waiting until 2013 to invoice customers who received services in late 2012 if you are on the cash basis of accounting.
  • Make additional catch-up contributions for those over age 50 to retirement savings plans. For 2012, the catch-up contribution amount is $5,500 for a 401(k) plan and $2,500 for a SIMPLE plan.
  • Consider converting 401(k) or an IRA to a Roth 401(k) or Roth IRA.
  • If a Roth conversion was done earlier in the year, and the account value has since declined, consider recharacterizing the rollover or conversion back to a traditional IRA and later reconvert it to a Roth IRA to reduce the taxes paid on the original conversion (note that you must wait 30 days from the date of conversion to recharacterize the conversion).
  • Offset capital gains with capital losses—to offset 2012 capital gains, get rid of some losing stocks this year, assuming you don’t have capital loss carryovers. In addition, consider trading losing investments for those with better prospects to create capital loss carryovers that could be used to offset future capital gains at potential higher rates, assuming the preferable capital gains rates expire.
  • Consider making expenditures (new equipment, for example) that qualify for 50% bonus first-year depreciation if bought and placed in service this year. Businesses also should consider making expenditures that qualify for the (up to $139,000) Sec. 179 business property expensing option for assets bought and placed in service this year.
  • Are medical bills close to exceeding the 7.5% of your income? Go ahead and pay for some elective procedures before December 31.
  • Consider the small business tax credit for health insurance premiums paid.
  • Consider payment of bonuses before year end.
  • Talk to your tax advisor about your tax basis in your S-Corporation or Partnership and the ability to currently deduct losses.
  • Remember required minimum distributions from your retirement plan for 2012 if you are over age 70 1/2.
  • Consider 529 college savings plan contributions for yourself, your children, or your grandchildren.
  • Remember home mortgage interest deduction is limited to interest on a $1 million acquisition mortgage and interest on a $100,000 home equity loan used to improve a home. The IRS is scanning returns for interest in excess of $60,000.
  • If you are self-employed and haven’t done so yet, consider setting up a self-employed retirement plan.

Remember, tax planning can be very complex. It is important you contact us before taking any action. We look forward to talking with you about these tax planning items or any other tax matter.

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