2012 Year-End Tax Planning: Uncertainty Abounds

Posted on 11.28.12

2012 Tax Planning At Keiter, we were hopeful that the election might bring a bit of clarity and action, but so far that doesn't seem to be the case.  The linked presentation highlights upcoming tax changes.  Assuming Congress and the White House are unable to reach agreement on short term tax policy in the coming month, these changes may directly impact your business and you.  The media is covering this a good bit and we will continue to update you as we have more definitive answers.  Tax Planning under these conditions is challenging, at best. However, we want to make you aware of these important matters.  ACCESS PRESENTATION HERE.

Potential Tax Changes on the Horizon

Surtax – effective 1/1/2013
As you have probably read, there are two new taxes that will take effect in 2013 as a result of Obamacare - a .9% tax on earned income (wages, 1099 income or active partnership pass through income that is considered earnings from self-employment) in excess of $250,000 and a 3.8% tax on investment income (interest, dividends, capital gains, and passive Sub-S and partnership income).  These surtaxes are not related to the Bush-era tax cuts, so even if relief is granted on a rate increase, these surtaxes are likely to still be applicable.

Rising Tax Rates
Additionally, other changes are scheduled to occur as a result of the expiration of Bush-era tax cuts due to end after 2012.  Pages 4 to 8 detail the pending changes.  This is referred to as the "fiscal cliff", and is being hotly debated in the Executive and Legislative branches of government.  Where this will end up is presently unknown.  You may have read that the President wishes for the expirations to apply to married couples with income over $250K and singles with income over $200K.  The Republican Party doesn't want tax rates to increase for any taxpayers, but is willing to forgo some current deductions (possibly mortgage interest and charitable contributions) instead.  Page 9 details some of the President's proposed changes.  We'll have to see how things play out.   Again, very hard to plan at this moment, but there will most likely be increases in one way or another.  

Suggested Action for Investments
We recommend that individuals meet with their investment advisors to decide whether they have capital gains that it would make economic sense to take before year-end, after which the Long term capital gain (LTCG) rate potentially increases from 15% to 20% and gains are also subject to the new 3.8% tax for higher income taxpayers.  This is ultimately an investment decision that considers issues other than taxes.  The timing of when you would normally sell/ recognize the gain and the performance of the stock are very critical.    The timing of when you would normally sell/ recognize the gain and the performance of the stock are very critical.   Note that page 11 of the attachment provides a break-even example for selling investments at 15% vs. 20% LTCG rates based on length of time the investment is held.

Business Changes – Depreciation
Please note on page 12 the changes for tax write-offs of fixed assets.  Depreciation (regular, bonus, Section 179) have changed many times over the past few years.  If you are considering large fixed asset purchases – be sure to consider these changes.  At present, there is no plan to extend the bonus depreciation and Section 179 expensing is to be curtailed after 2012.

Estate/ Gift Planning
More uncertainty in this area as we are not sure what the gift tax exemption and estate tax exemptions will be after 2012.  What we do know is that 2012 is a great time to make gifts – lifetime exemption for gifts is the same $5,120,000 (same for Generation Skipping Tax ("GST"). For those who may want to make large lifetime gifts – now is a great time. We would be pleased to discuss gifting alternatives with you.

Need Additional Information on Your Specific Situation?

Please contact your Keiter tax team regarding these tax changes and how they may impact you and your business. We are here to assist you in identifying opportunities and navigating the impending tax changes for the best possible solution for your specific situation.