To Our Clients and Friends:
Year-end planning will be more challenging than normal
this year. Unless Congress acts,
starting in 2013, individuals will see higher tax rates across the board and a
number of popular deductions and credits will be gone. Estate and gift tax rates will be higher as
well. Additionally, a number of popular
deductions expired at the end of 2011 and won’t be available for 2012.
Deductions not available this year include, for
example, the election to deduct state and local sales taxes instead of state
and local income taxes and the above-the-line deductions for tuition and
educator expenses. Deductions and
credits that will disappear at the end of this year include generous bonus
depreciation and expensing allowances for business property and the expanded
tax credits for higher education and dependent care costs. Also, the phase-out rule that reduces
write-offs for the most popular itemized deduction items (including home
mortgage interest, state and local taxes, and charitable donations) for high
income taxpayers is scheduled to come back in 2013.
Finally, as a result of the Healthcare Act, two new
Medicare taxes will kick in starting in 2013.
First, there will be a new 0.9% Medicare surtax tax on wages and
self-employment earnings exceeding $200,000 ($250,000 if married filing
jointly; $125,000 if married filing separately). There will also be a new 3.8% Medicare
contribution tax that will apply to the lesser of (1) net investment income,
including interest income (but not if it is tax-exempt), capital gains, and
dividends; or (2) modified Adjusted Gross Income (AGI) in excess of $200,000
($250,000 if married filing jointly; $125,000 if married filing
separately).
These tax increases are by no means a certainty. Congress could extend the Bush-era tax cuts
for some or all taxpayers, 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
be seen. For the latest developments and
additional details, visit our website at www.dehmelcpa.com. Additionally, tax
planning appointments are available in our office, call us at 317-248-2202.
Despite uncertainties, what we can say for sure is
that the 2012 federal income tax environment is still quire favorable, but we
may not be able to say that for long.
Therefore, tax planning actions taken between now and year-end may be
more important than ever. This letter
presents some planning ideas to consider while there is still time to act
before year end. Some of the ideas may
apply to you, some to family members, and others to your business.
Traditional
Strategy of Deferring Income is Dicey This Year
Be careful when considering the time-honored strategy
of deferring taxable income from this year into next year. The strategy makes sense if you’re confident
you’ll be in the same or lower tax bracket next year, but the tax picture for
2013 is blurry. While we can hope that
Congress will deal with these issues now that the election has passed, even
with an outcome there will be very little, if any, time for planning.
The best course of action may be to start now to
identify ways you could defer or accelerate some of your income and deductions
between 2012 and 2013, but wait to pull the trigger until we know more. Cash-basis businesses may be able to control
the timing of income by sending out December invoices early (if they want the
income received in 2012) or late (if they want it received in 2013). They may also be able to accelerate or defer
deductions by carefully timing the payment of expenses or the purchase of
business supplies and equipment, so they fall in 2012 or 2013, whichever is
preferred.
The uncertainty about future tax rates makes
definitive advice difficult. When we
have better information about 2013 tax rates, we will update this blog with thoughts about deferring income (or not).
Ideas for
Increasing Deductions
Make Charitable Gifts of Appreciated
Stock. If you have appreciated stock (or mutual fund
shares) that you’ve held more than a year and you plan to make significant
charitable contributions before year-end, consider keeping your cash and
donating your stock instead. You’ll
avoid paying tax on the appreciation, but will still be able to deduct the
donated property’s full value.
However, if the stock is now worth less than when you
acquired it, sell the stock, take the loss, and then give the cash to the
charity. If you give the stock to the
charity, your charitable deduction will equal the stock’s current depressed
value and no capital loss will be available.
However, if you sell the stock as a loss, you have to wait 31 days to
buy it back. Otherwise, you will trigger
the wash sale rules, which means your loss won’t be deductible, but instead will
be added to the basis in the new shares.
Don’t Lose a Charitable Deduction for
Lack of Paperwork. Charitable contributions are only deductible
if you have proper documentation. For
cash contributions of less than $250, this means you must have either a bank
record that supports the documentation (such as a cancelled check or credit
card receipt) or a written statement from the charity that meets tax-law
requirements. For cash donations of $250
or more, a bank record is not enough. You
must obtain, by the time your tax return is filed, a charity-provided statement
that shows the amount of the donation and lists any significant goods or
services received in return for the donation (other than intangible religious
benefits) or specifically states that you received no goods or services from
the charity.
Accelerate Itemized Deductions into This
Year.
For 2012, itemized deductions are allowed in full regardless of your
AGI. However, this phase-out rule that
reduces write-offs for the most popular itemized deduction items (including
home mortgage interest, state and local taxes, and charitable donations) is
scheduled to come back in 2013 unless Congress takes action to prevent it. If the phase-out rule comes back, it will
wipe out $3 of affected itemized deductions for every $100 of AGI above the
applicable threshold. For 2013, the AGI
threshold will probably be around $178,000, or around $89,000 for married
individuals who file separate returns.
Bottom Line: Depending on
your AGI, you may get more tax-saving benefit from accelerating into 2012 your
state and local tax payments that are due early next year and some charitable
donations that you’d normally make in 2013.
However, things get a bit tricky if you’ll be subject to Alternative
Minimum Tax (AMT) this year. Please
contact us if you have questions about the advisability of accelerating
itemized deductions into this year.
Leverage Standard Deduction by Bunching
Deductible Expenditures. If your 2012 itemized deductions are likely to be just
under, or just over, the standard deduction amount, you might want to consider
the strategy of bunching together expenditures for itemized deductions every
other year, while claiming the standard deduction in the intervening
years. The 2012 standard deduction is
$11,900 for married joint filers, $5,950 for single and married filing separate
filers, and $8,700 for heads of households.
Take
Advantage of the 0% Rate on Investment Income
For 2012, the federal income tax rate on long-term
capital gains is 0% to the extent they fall within the 10% or 15% federal
income tax rate brackets. This will be
the case to the extent your taxable income (including long-term taxable gains
and qualified dividends) does not exceed $70,700 if you are married and file
jointly ($35,350 if you are single).
While your income may be too high to benefit from the 0% rate, you may
have children or grandchildren who will be in one of the bottom two brackets. If so, consider giving them some appreciated
stock or mutual fund shares that they can sell and pay 0% tax on the resulting
long-term gains. Gains will be long-term
as long as your ownership period plus the gift recipient’s ownership period
(before he or she sells) equals at least a year and a day.
If the Bush-era tax cuts are allowed to expire at
year-end, the minimum tax rate on 2013 long-term gains for these taxpayers will
be 10% (or 8%) for gains from certain investments held for over five
years). So consider doing what you need
to do to take advantage of the 0% rate this year. Next year, it might be history.
Take Your
Required Retirement Distributions
The tax laws generally require individuals with
retirement accounts to take withdrawals based on the size of their account and
their age beginning with the year they reach age 70 ½. Failure to take a required withdrawal can
result in a penalty of 50% of the amount not withdrawn. If you turned age 70 ½ in 2012, you can delay
your required distribution to 2013 if you choose. But, waiting until 2013 will result in two
distributions in 2013 – the amount required for 2012 plus the amount required
for 2013.
Year-end
Moves for Your Business
Take Advantage of Tax Breaks for
Purchasing Equipment and Software. Your business may be able to take advantage
of the temporarily increased Section 179 deduction. Under the Section 179 deduction privilege, an
eligible business can often claim first-year depreciation write-offs for the
entire cost of new and used equipment and software additions. For tax years beginning in 2012, the maximum
Section 179 deduction is $139,000 (assuming eligible property purchases for the
year don’t exceed $560,000). For tax
years beginning in 2013, however, the maximum deduction is scheduled to drop
back to only $25,000.
Your business can also claim first-year bonus
depreciation equal to 50% of the cost of most new (not used) equipment and
software placed in service by December 31 of this year. For a new passenger auto or light truck that’s
used for business and subject to the luxury auto depreciation limitations, the
50% bonus depreciation break increases the maximum first-year depreciation
deduction by $8,000 for vehicles placed in service this year. The 50% bonus depreciation break will expire
at year-end unless Congress extends it.
Contact us if your want more details about these generous, but
temporary, tax breaks.
Check Your Partnership and S Corporation
Stock Basis. If you own an interest in a partnership or S
corporation, your ability to deduct any losses it passes through is limited to
your basis. Although any unused loss can
be carried forward indefinitely, the time value of money diminishes the
usefulness of these suspended deductions.
If you expect the partnership or S corporation to generate a loss this
year and you lack sufficient basis to claim a full deduction, you may want to
make a capital contribution (or in the case of an S corporation, loan it
additional funds) before year end.
Watch out
for AMT
While many tax-law changes over the last 10 years have
been helpful in reducing your 2012 federal income tax bill, they didn’t do much
to reduce the odds that you’ll owe the Alternative Minimum Tax (AMT). It is critical to evaluate all tax planning
strategies in light of the AMT rules before actually making any moves. Because the AMT rules are complicated and we
still don’t know exactly what they will be for 2012, you may want our
assistance. Again, tax planning
appointments are available, call us at 317-248-2202.
Don’t
Overlook Estate Planning
For
2012, the unified federal gift and estate tax exclusion is a historically
generous $5.12 million. However, the
exclusion will drop back to only $1 million in 2013 unless Congress takes
action. In addition, the maximum federal
estate tax rate for 2013 is scheduled to rise from the current 35% to a
painfully high 55%. Therefore, planning
to avoid or minimize the federal estate tax should be part of your overall
financial game plan. Even if you already
have a good plan, it may need updating to reflect the current $5.12 million
exclusion and the uncertainty about next year’s rules.
To be
Continued
This letter is intended to give you just a few ideas
to get you thinking about tax planning moves for the rest of this year. For more up-to-date information, continue to visit this blog. For thoughts and ideas specific to your
situation, schedule an appointment with us at 317-248-2202.
Best
regards,
Dehmel
& Associates, PC, CPAs
