Johanna Fox Turner
We’re coming up on that busy time of the year. I don’t mean Christmas shopping — it’s tax planning season! Do you know how difficult it is to decorate for tax planning season? We are still waiting to see if the Bush tax cuts will be extended and the implications affect us all.
Below are some of the most important changes set to go into effect, along with my suggestions:
— The top tax bracket is set to increase from 35 percent to 39.6 percent.
As the economy struggles to its feet, you may end up in the top bracket. If so, consider moving itemized deductions (charitable, medical, etc.) forward to 2013 and income back to 2012.
Consider a Roth conversion.
— Qualified dividends will be taxable at your marginal tax rate. This means that the prior 15 percent tax ceiling on dividends will disappear and you will be taxed as high as 39.6 percent on them.
Consider owning dividend-paying stock in retirement accounts and IRAs beginning 2013.
Consider taking dividends from closely-held corporations in 2012 if appropriate.
— Long-term capital gains (“LTCG”s) are going up. The top long-term capital gains rate will increase from 10 percent to 20 percent for all but lower-income taxpayers, who will now pay 10 percent instead of nothing. Certain gains from Qualified 5-Year LTCG property will be taxed at a maximum rate of 18 percent.
Consider selling LTCG property in 2012 (unless you plan to pass the property on at death).
Consider selling to lock in the gain at the lower tax rate and then repurchase.
Consider electing out of the installment method for an installment sale in 2012
— The “marriage penalty” tax rates for middle income taxpayers is back in 2013.
Again, consider moving itemized deductions forward to 2013 and income back to 2012.
— Itemized deductions are reduced and exemptions are phased out for higher income taxpayers. Under current law, itemized deductions are not subject to any overall limitation. Beginning in 2013, married taxpayers with taxable income above $174,450 will lose some of their itemized deductions. Personal exemptions begin disappearing at $174,450 for singles, and $261,650 for married couples.
Consider bunching up itemized deductions in 2012, for example: pay your Jan. 13 house payment on Dec. 31, move 2013 charitable contributions to 2012, and pay large medical bills in 2012.
I realized this is contrary to my earlier advice to move deductions to the future. This highlights the need to work with a professional who can help with your specific situation.
— Higher income employees will owe an additional 0.9 percent payroll tax on wages over $250,000 (married) and $200,000 (single). Employers will not necessarily know when to withhold the tax, though, so planning is especially valuable if you may qualify. Net self-employment income counts as wages.
Consider some serious tax planning with your advisor if you or your spouse owns a business. A change in business formation may help, but that analysis is beyond the scope of this article. You can find more information at http://1.usa.gov/R7HGxn
— A new 3.8 percent Medicare Contribution Tax is scheduled to take effect in 2013. This tax, which was enacted as part of the Patient Protection and Affordable Care Act (PPACA) is not affected by the Bush tax cuts but will be imposed upon “high-income” taxpayers who have investment income.
Consider some serious tax planning with your advisor if you think you might be subject to this tax. Unfortunately, there is a lot of uncertainty about this tax.
This vaguely-worded tax may be the most onerous and is sure to see some action in court.
NOTE — there has been some confusion over whether this tax applies to the sale of homes. To clarify, the 3.8 percent tax applies only after a home is sold for a gain of over $250,000 per person.
— The mother of all changes, the $5 million lifetime gift and estate exclusion is scheduled to go back to $1 million on January 1 and estate tax rates will go from 35 percent to 55 percent. This is an opportunity you don’t want to miss. Many taxpayers don’t realize that this affects them. Please see a tax adviser!
A few of the other changes affecting individuals are:
— The threshold for deductibility of medical expenses rises from 7.5 percent to 10 percent.
— Only student-loan interest paid back during the first 60 months in which student loan interest payments are required will be deductible.
— The standard deduction for joint married filers goes down.
— The child tax credit is cut in half.
— The home sale exclusion will no longer apply for heirs, estates, and
qualified revocable trusts.
This is a most unusual year as we await a possible tax shakeup in January. You owe it to yourself to find a great financial and tax-planning professional who can help with your specific situation before the end of the year. Conventional wisdom may be to take deductions now and pay taxes later, but you might never ever get a better deal than 2012.
Johanna Fox Turner, CPA, CFP, RLP, is CEO of Milestones Financial Planning, LLC in Mayfield. She is president of Johanna Fox, CPA and publishes a free monthly financial newsletter (email advisor@milestonesfp.com to subscribe). Contact Turner at jft@milestonesfp.com, 270-247-0555, 800-991-2721, or at www.milestonesfp.com.
