Year End Tax Planning Opportunities
Although we now have the election results, we do not have clear guidance as to what tax law changes will be implemented. However, we do know that Obamacare will not be repealed, and that means some planning opportunities for you.
Congress has not passed a "patch" to help insulate many taxpayers from incurring alternative minimum tax in 2012. If nothing is done, approximately 30 million additional people will pay more income tax in 2012 than they would have paid on the exact same income calculated under the 2011 rules. Simplistically, alternative minimum tax is calculated by taking your regular gross taxable income and not allowing certain deductions, such as personal exemptions, medical deductions, state income tax, real estate taxes and sales tax. The result is taxed at a flat rate of either 26% or 28% depending on filing status. You pay the higher of regular tax or alternative minimum tax.
Congress has failed to extend the sales tax deduction for individuals for 2012. Also, as of January 1, 2013, the 2% payroll tax decrease for employees will be eliminated. The tax will revert back to 6% from 4% unless Congress extends it. We do know the new 3.8% Medicare contribution tax will be imposed beginning on January 1, 2013. The tax is 3.8% of the lesser of (a) net investment income or (b) the excess of modified adjusted gross income (MAGI) over the applicable threshold amount ($100,000 - $250,000). Net investment includes interest, dividends, rents and capital gains. This means that it may be beneficial to accelerate income into 2012. There is also a strong chance that the tax rate on long-term capital gains will increase from the current 15%. You would be paying capital gains at a higher rate and incur the Medicare surtax if you are above the thresholds.
Contact us to see the tax rates scheduled to go into effect January 1, 2013.
If you turned age 70 1/2 during 2012, you have the option to take your required minimum distribution (RMD) during 2012 or wait until 2013. Although the distributions themselves are not considered investment income, the distribution will increase your MAGI and could push you above the threshold to subject your net investment income to the Medicare surtax. In addition, earnings and capital transactions incurred after they are distributed to you personally would be included in your net investment income. Typically, we recommend you defer your income whenever possible, but this year is different. You will need to evaluate your particular situation to determine if it is wise to take two years' worth of distributions in 2013 or spread it between the two years.
Health Savings Accounts can be funded right up until the initial due date of your 2012 income tax return (April 15, 2013).
Contact us for the 2012-2013 funding limits.
Another important area for tax planning relates to estate and gift taxes. The lifetime exemption for 2012 is $5 million and is scheduled to revert to $1 million for 2013 absent any legislative action. This presents a unique opportunity to make substantial gifts and remove assets from your estate before year end. If you are considering a gift of partnership interest, for example, be aware that gifts of this nature may require an appraisal or other legal documents prepared and must be initiated with enough working time to accomplish your goals.
Contact us for a summary of expiring tax provisions.
If you are interested in year-end tax planning, please contact George Wilmoth at 423.702.7274, HHM specializes in tax advisory services, and we would be happy to review your current situation, show how recent tax changes may affect you, and suggest tax-smart ways to achieve your short-and long-term financial goals.