Year End Tax Planning for 2012

Taxes Blog - JLFranklin Wealth Planning

Higher taxes are a real possibility for 2013, and year-end tax planning in 2012 makes sense to lessen the impact. A “fiscal cliff” is looming for the United States. On January 1, 2013, the Bush-era tax cuts, including the temporary payroll tax cut and extended unemployment benefits, are due to expire. At that time, $1.2 trillion of automatic spending cuts begin to kick in—the result of the 2011 Congressional super committee’s failure to reach consensus. The U.S. is experiencing political dysfunction, which could translate to policy errors as Washington attempts to take action.

The November election results will influence what happens to tax rates in 2013. The predictions below come from The Kiplinger Tax Letter, September 28, 2012.

  • If re-elected, President Obama will assert he has a mandate for tax hikes on upper-incomers, and he is loath to compromise on that again. However, the battle about tax rates may spill over to 2013, punted to the next Congress.
  • Who’s most at risk of higher tax rates? Millionaires. President Obama will insist that rates rise for single filers with incomes over $200,000 and couples with incomes above $250,000. But some moderate Senate Democrats dislike this proposal; if a tax rate hike is approved, it’s likely to hit only taxpayers with taxable income over $1 million.
  • There is no way that the tax rates for 2012 will be increased retroactively.
  • A 3.8% Medicare surtax applies to capital gains beginning in 2013 for singles with adjusted gross incomes above $200,000 and couples over $250,000. Thus, the top tax rate on capital gains is rising next year for upper-incomers anyway, even if the 15% maximum capital gain rate ends up being extended for everyone in 2013.
  • Capital gain tax rates are currently 15% and will likely remain at that level for those with less than $1 million of income. However, it’s possible that millionaires may see capital gain taxes increase to 20%.
  • The current estate tax rules are expected to remain in effect in 2013, including the $5 million estate tax exemption and the retention of portable exemptions for surviving spouses.

Action Items to Consider

  • If you earn more than $250,000 in adjusted gross income ($200,000 if you’re single), move capital gains (from sales of stock or property) into 2012 to avoid the 3.8% Medicare surtax that begins in 2013.
  • If you expect income over $1 million in 2013, accelerate income into 2012. This includes bonuses, exercise of stock options, and payment of business income, in order to lock in the 35% maximum rate on that income.
  • If you expect income over $1 million in 2013, defer deductions to 2013. This includes deductions for charitable contributions, state income tax payments, property tax payments, and business income.
  • Consider a Roth IRA conversion in 2012.
  • If you earn more than $1 million, many of the traditional planning ideas are reversed for 2012. In 2012, you’ll want to accelerate income and defer deductions.