Tax planning at year-end is always complicated by the uncertainty that the following year may bring. With 2012 being an election year, the question looming over us all is, will the “Bush Era” tax cuts set to expire be extended? No one has a crystal ball at this point and most Democrats and Republicans in Congress appear to be taking a wait and see approach to deciding the fate of some tax provisions that are set to expire. This all makes year-end tax planning this year, even more challenging than any other year in recent memory. However, here are a few areas that we think most taxpayers should discuss with their tax adviser in the near future:
- Consider accelerating income in n 2012. With income tax rates set to increase next year, it may be an ideal time to do a mix of accelerating some types of income and deferring others. Some examples of this would be a company doing their billing a little earlier in December than normal and paying expenses in January as opposed to December. A healthy mix of the two (accelerating and deferring income) will need to be considered on a case by case basis, as the situation for each taxpayer will be different.
- Capitalize on the expiring Long-Term Capital Gains Rates. Currently the Long-Term Capital Gain rates are maxed out at 15%. Taxpayers in the 10-15% income tax brackets can capitalize by selling some stock that they currently have Long-Term Gains on and take advantage of 0% tax on those. Other individuals can take advantage of the 15% maximum Capital Gains rates that are set to go up in 2013.
- Taxpayers that own businesses that were formerly C-Corporations and are now S-Corporations will want to look to see if they have prior C-Corp earnings in their retained earnings (Also known as E&P). If they have prior C-Corp earnings they will want to look at taking those as dividends and capitalize on the low qualified dividend rates. Currently the qualified dividend rates are treated like the Long-Term Capital Gain rates.
- There are possible big changes that will affect your Gift Tax & Estate Planning. There is the normal $13,000 that can be given per year, and we expect this to continue on past 2012, however the big annual exclusion of $5.1 million is set to expire on December 31, 2012, and be reduced to $1 million next year. So for high wealth individuals, it may be wise to do a little estate planning before year-end, if they wish to lower the potential value of their estate.
