2012 Tax Planning

Summertime, and the livin’ is easy… You’re probably thinking about trips to the beach, and adult beverages with little umbrellas in them, but you know what I’m thinking about? Tax planning! Yeah baby, there aren’t many better ways to spend a summer day than thinking about saving money on your taxes. Well, maybe a nice cold beer wouldn’t hurt either!

If you recall back in 2010, there was a lot of uncertainty over tax planning, because nobody knew if the “Bush tax cuts” were going to be extended or not. Well, we’re in the same exact boat again, because the two year extension that was enacted in 2010 expires at the end of 2012. Plus ca change, plus c’est la meme chose…if you don’t understand French, just pop the phrase into Google. Or to quote Aerosmith, “it’s the same old story, same old song and dance, my friend”.

Here are a few things to consider this year

Roth conversions-if tax rates go up in 2013 (as Bush tax cuts expire), anybody considering making a Roth conversion should do it in 2012, while the rates are still lower. Then any future earnings will be tax-free (assuming Congress doesn’t eliminate Roths some time in the future).

Realizing capital gains-as with ordinary income tax rates, expiration of the Bush tax cuts will mean that the long-term capital gains rate will increase from 15% to 20%, so realizing gains in 2012 will mean less tax to pay on the gains. Any investment could then be re-purchased if desired.

Tax-exempt bonds-hand in hand with the possible tax cut expiration is the beginning of a new Medicare tax of 3.8% on investment income (interest, dividends, capital gains, etc) for people with adjusted gross income over $200K single/$250K married filing jointly. One way to reduce that is to move investments to tax-exempt bonds. The income on those isn’t subject to the Medicare tax.

Gifts-currently there’s a gift tax exclusion of just over $5 million. This is set to revert to $1 million in 2013 under the current law. What this means is that 2012 is the last chance to make a lot more gifts to children or others, without incurring gift tax.

Accelerating and deferring-the CPAs usual tax planning mantra is to advise clients to accelerate deductions and defer income from the current year to the following year. With tax rates set to increase in 2013, the opposite would hold true, that is, take the income now (so it’ll be taxed at a lower rate), and defer deductions (so they’ll reduce taxable income at a higher rate). Accelerate? Defer? Too soon to tell, but this is something to consider as year-end nears, and especially after the November elections, when both sides of the aisle will probably show their cards.

In summary, is there a lot of uncertainty when it comes to tax planning? You betcha. In spite of that, it’s always a good idea to think of these things sooner rather than later. Well thought out decisions are always better than knee-jerk reactions, and once the calendar turns over to 2013, a lot of planning opportunities will be gone, so while you’re sitting in that inflatable kiddie pool with a beer in your hand, be thinking about taxes, o.k.?

What are your thoughts about tax planning, or the end of the “Bush tax cuts”, or beer? Post a comment, and please forward this article to friends or colleagues who you think could benefit from it.

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