Year End Tax Tips

I know year-end tax planning isn’t much fun, but a little sound Financial Planning could reduce the taxes you owe. With so much uncertainty around the “Fiscal Cliff” and 2013 tax rates, now is the time to plan!

2013 tax regulations are still NOT clear, and may NOT be until after the first of the year. You can still reduce the taxes you owe for 2012 and get a plan in place for next year.

FOR INDIVIDUALS:

Accelerate Income for 2012 and Defer Deductions to 2013

Income Side: If tax rates increase next year, paying taxes now at this year’s lower rate may be the smart move. Consider accelerating bonuses, self-employment income, taking IRA distributions, and/or convert a traditional IRA to a Roth IRA before Dec 31st. 

Deduction Side: You may be able to delay mortgage interest payments, real estate taxes, medical expenses, and gifts to charity until 2013. Delaying deductions until 2013 will help reduce income next year that may be taxed at higher rates. Assuming Congress doesn’t limit these types of deductions for 2013. Ugh!!!

Itemize Deductions Every Other Year

If your 2012 itemized deductions will be just under or just over the standard deduction amount consider combining expenses for itemized-deduction items every other year. The 2012 standard deduction is $11,900 for married couples filing a joint return, $5,950 for singles and married individuals filing separately, and $8,700 for heads of household. If you are age 65 or older, you may increase your standard deduction by $1,450 if you file single or head-of-household. If you are married filing jointly and you OR your spouse is 65 or older, you may increase your standard deduction by $1,150. If BOTH you and your spouse are 65 or older, you may increase your standard deduction by $2,300. I think this year is a good one to go with the standard deduction and if the tax rates go higher for 2013, itemized your deductions. 

Accelerate Medical Expenses This Year

For 2012, the itemized deduction for medical expenses equals the excess of qualified expenses over 7.5% of adjusted gross income (AGI). Next year, the threshold rises to 10% of AGI.

Maximize Retirement Account Contributions

It’s not too late to maximize contributions to your retirement accounts. Contributions reduce your taxable income.

Take Advantage of Lower Long-Term Capital Gains Tax Rates

For 2012, the federal income tax rate on long-term capital gains is 0% if you are in the 10% or 15% federal income tax rate brackets. If all the Bush tax cuts are allowed to expire at year-end, the 0% Capital Gains rate does too, so consider selling investments with gains in 2012 to take advantage of the current rate.

Even if you fall into a higher tax bracket, selling assets now to take advantage of today’s low rates may still make sense. This move avoids the potential higher capital gains tax rate in 2013 and the new Medicare tax of 3.8% on net investment income, which goes into effect for high net-worth investors.

Give Some Money Away

The $5.12 million gift tax exemption and the 35% rate are scheduled to expire at year end. Without congressional action, the top estate and gift tax rate will be 55% in 2013, with an exemption of only $1 million.

FOR BUSINESS OWNERS:

Bonus Depreciation is scheduled to expire on Dec. 31

A company can take “bonus” depreciation of 50% of the cost for qualified property acquired and generally placed in service by year-end 2012. A company is also allowed, under certain circumstances, to expense up to $139,000 of qualified property in 2012—an amount that drops to $25,000 next year. In considering this limit, you should know that up to $25,000 of the cost for sport utility vehicles (weighing more than 6,000 pounds) can be expensed in 2012, with an additional 50% bonus depreciation allowed on the remainder.

Consider Paying a Dividend

There’s a reason Dillard’s and Wal-Mart are approving bigger dividends and paying them earlier. Generally, the highest individual income tax rate on qualified dividends is 15% for 2012. This rate is scheduled to rise to 39.6% for 2013 unless Congress otherwise extends the 15% rate or agrees to some rate in between. There will also be an additional 3.8% “Medicare” tax in 2013 on net investment income (which includes dividends) for high income individuals. This tax applies to the lesser of net investment income or modified adjusted gross income over $200,000 for a single taxpayer ($250,000 for married filing joint taxpayers). The Medicare tax will apply as enacted and should not be affected by whether the 15% dividend rate is extended or increased up to 39.6 percent. This is particularly relevant for closely held corporations and for S corporations that have C corporation earnings and profits where shareholders could benefit from lower dividend rates.

Review Future Impact of ObamaCare

Under the health care reform act an employer can be taxed up to $2,000 per full time employee (with the first 30 exempt) if it carries insufficient or no health insurance for its employees. This tax does not start until 2014 and it only applies to “applicable large employers”, which are those employers who have, on average, at least 50 full time equivalent employees during 2013. Companies should review their employment levels in early 2013.

Hire A Veteran

The Work Opportunity Credit of up to $9,600 is still available for hiring an unemployed veteran, but in order to be eligible for the credit, you must have the qualified veteran start work before 2013.

These are just a few of things sound Financial and Tax Planning can do to reduce your overall tax bill. If you current Advisor is NOT helping you solve these issues, let's meet for coffee so you can learn more about how my comprehensive Fee-Only Planning Process can help you. www.JasonQuallsCFP.com or 615-878-2134.