Uncertainty is the name of the game when it comes to year-end tax planning. A combination of events which include possible expiry of the Bush-era tax cuts, imposition of new Medicare taxes on investment and wages, massive federal budget cuts threaten to throw the economy back into recession. This has resulted in many taxpayers asking how they can prepare for 2013 and beyond. Here are some tax planning strategies taking into account the various possible scenarios and outcomes.
Strategies to mitigate the impact of these tax increases
Plan how much, if any, capital gains on appreciated securities you would want to recognize in 2012. Prioritize what holdings should be sold.
If you are planning to sell your business, try to close the sale in 2012 to take advantage of the lower capital gains tax rate.Gain from installment sale payments is taxed in the year received; payments received in 2013 on a 2012 sale would be subject to the higher capital gains rate.
If you plan on selling your home and the gain exceeds the $500,000 home exclusion, plan to close by year-end so that the gain will still be taxable, but will avoid the 3.8 percent Medicare tax.
Distributebonus payouts in 2012 to mitigate the employee payroll tax increase.Consider
accelerating income to 2012 to take advantage of the lower rates. Likewise you may want to defer deductions until 2013 to offset the higher rates in that year.
The 2 percent payroll tax cut will expire (reducing take-home pay for employees and increasing self-employment tax for qualifying individuals).
Accelerate income to minimize being hit by the new 0.9% Medicare tax - Effective January 1, 2013, higher income individuals will be subject to an additional 0.9 percent HI (Medicare) tax. The additional Medicare tax is also applicable for the self-employed.
Pay medical expenses before the deduction threshold increases - This year, the AGI threshold is set at 7.5%, while next year, it will increase of 10% for most taxpayers due to a provision in the 2010 health care reform act. Hence, consider moving up some of the medical procedures and purchases planned for next year so that you can take full advantage of this year's lower deduction threshold.
Every tax situation is different and requires a careful and comprehensive plan. GKM can assist you in aligning traditional year-end techniques with strategies for minimizing your 2012 and 2013 taxes.