Tax Planning Between Now and Year End

Published: November 16, 2012

by Jim Wagoner, CPA | Partner, Director of Tax Services Group and Brandon Cook, CPA | Partner, Tax Services Group

President Obama has proposed a $1.6 trillion revenue increase, to come from corporations and high income individuals, to help solve the deficit problem. It appears a major battle will ensue, but that doesn’t change the fact that we need to plan for what is likely to happen. Obama’s plans are short on detail, which makes decision making even more difficult. The increases to come from corporations deal largely with taxing overseas income and closing perceived foreign loopholes. The impact on the high income individual taxpayer relates to rate increases and limitations on the tax rate benefit for itemized deductions. For example, while the taxpayer may be in the 35-39.6% tax bracket, his/her deductions would only reduce taxes at 28%. There have been other ideas tossed around in the past, including limiting or eliminating deductions for charitable contributions and mortgage interest. So, what do we know, and how might we best plan?

The Bush era tax cuts expire at the end of 2012. These could be extended for lower and middle income taxpayers (those up to $250,000, or $1,000,000 in income).
Capital gains rates are set to return to 20% and taxation of qualified dividends will increase from 15% to ordinary income tax rates.
Itemized deduction and personal exemption phase outs will return.
The Alternative Minimum Tax exemption ‘patch’ has yet to be extended for 2012, thus creating larger tax liabilities for unsuspecting taxpayers.
Obamacare tax rates will kick in January 1, 2013, meaning those with wages or self-employment income over $250,000 (joint returns) will pay an additional ‘Medicare tax’ of 0.9%. Investment (including capital gains) and most passive income (other than retirement income) for those taxpayers will have a 3.8% ‘Medicare tax’ added.

Planning Thoughts

Defer personal and business deductions to 2013 where they will potentially offset higher tax rates.
Accelerate income into 2012 where it will likely be taxed at a lower rate-this could include income from bonuses, exercising stock options, etc.
Recognize capital gains in 2012 where appropriate. This makes the most sense where the recognition is mostly a ‘timing’ issue. If this is a gain that would not otherwise likely be recognized in the next 3 years, it may not be worth consuming capital to pay tax in order to save 5-9% in tax rate differences.
Accelerate business capital asset purchases to take advantage of bonus depreciation provisions and the maximum available section 179 deduction in 2012.
Re-visit whether it makes sense to convert regular IRAs to Roth IRAs-it’s best to have a long recovery horizon to do this.
Shift investment and passive income after 2012 to family members with adjusted gross income of less than $200,000.
For those with significant net worth, take advantage of the individual $5.12 million gifting exemption that expires at the end of 2012. This could include the sale or gift of family businesses, family limited partnerships, etc.
Distribute C corporation earnings and profits from current or former C corporations.

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