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Realizing Critical Tax Advantages with Year-End Tax Planning

11.01.2012

$ in lightbulb graphic, money ideasThe turbulent political environment is making year-end tax planning even more complex. Many provisions are set to expire in 2012. Avoid fiscal cliff diving. Strategic year-end tax planning can help you make the most of 2012 provisions before time runs out. Robin Bell, Member – Tax Services, and Cathy Goldsticker, also Member – Tax Services, discuss tax provisions due to expire in 2012 and how business owners can best prepare and be flexible in light of the uncertain tax environment.

Tax planning is especially complex this year given the turbulent political environment and a litany of tax laws due to expire at the end of 2012. From bonus depreciation to capital gains tax rates, if Congress fails to act and these provisions and others are allowed to expire, taxpayers could carry a significantly heavier financial burden in 2013.

“We know that tax laws are going to change, but we’re just not sure how,” says Cathy Goldsticker, CPA, member, tax services, at Brown Smith Wallace, St. Louis, Mo.

This year, more than ever, it is critical that businesses/business owners consult with their tax advisers as early as possible to discuss the what-ifs so they are prepared in December when we have a better idea of what 2013 tax law will bring, she says.

“All you can do with this level of uncertainty is plan, plan, plan,” says Robin Bell, CPA, member, tax services, at Brown Smith Wallace. Businesses and individuals should have several options depending on the outcome of the election.

Smart Business spoke with Goldsticker and Bell about tax provisions due to expire in 2012, and how business owners can best prepare and be flexible in light of the uncertain tax environment.

What measures can business owners take given tax law uncertainty?

Businesses that have not yet met their Section 179 threshold 2012 of $560,000 can invest in qualifying equipment and furniture so they can take the full write-off this year. Until the calendar year turns, the bonus depreciation of 50 percent still applies, and we’re not sure what will happen to this tax advantage next year.

Along the same lines, consider taking advantage of the current 15-year depreciation rate on qualified leasehold improvements, which fall into the three categories of commercial, retail and restaurant. This could roll back to the traditional 39-year depreciation tax write-off if the provision is not extended for 2013.

What could happen to the current low capital gains and dividend tax rates that are due to expire in 2012?

If nothing is done to extend current tax rates into 2013, the existing lower capital gains rate will expire. The 15 percent extended tax rate bracket changes to a 20 percent tax rate. Dividend income reverts from a 15 percent tax rate to a taxpayer’s ordinary income tax rate, which could be as high as 39 percent.

For business planning purposes, it may make sense to pay out dividends, if your corporation has accumulated earnings and profits, before the end of the year so those are taxed at the current 15 percent rate.

A potential capital gains and dividend tax rate hike could drastically affect retirement and investment planning, as well. Individuals may want to reconsider their investment strategy in dividend-paying stocks and choose exempt or fixed-income bonds, depending on projected rates of return.

What is known for certain about the 2013 tax situation?

Tax rates will not decrease, but it is not known how much they may increase or if possibly they may stay the same. That depends on how tax legislation shakes out at the end of 2012 following the presidential election and the decisions that Congress makes before new legislation starts during the lame duck session or afterward.

What we do know for certain is that the Medicare surtax is current law as part of the Patient Protection and Affordable Care Act. This 3.8 percent tax on net investment income will be imposed starting with the 2013 tax year on the lesser of an individual’s net investment income for the tax year or the amount by which their modified gross income exceeds the threshold amount that tax year — $250,000 for joint filers, $125,000 for married filing separate and $200,000 for all other filers. Essentially, this is a double tax that applies to individuals since this is a nondeductible tax.

Additionally, the 2 percent decrease to the Federal Insurance Contributions Act (FICA) rate that has been in effect for the past two years expires on Dec. 31, 2012, restoring the rate to 6.2 percent on wages and self-employment income. This will affect the take-home pay of all employees and owners.

For closely held businesses, it is important to consider salary management — look at payments and strategize the source of those payments in the most tax-efficient way.

Finally, the 3 percent ‘haircut’ for itemized deductions and personal exemptions is also set to expire in 2012. Bear in mind that itemized deductions and exemptions are phased out as income increases, so taxpayers will not get the benefits of all of their deductions as they have in the recent past. This calls for income management; if your income will increase in 2013, that may disallow some of your tax benefits and, theoretically, could put you in a higher tax bracket.

What additional tax provisions should individuals keep on the radar as they plan for 2012 and beyond?

For those taking advantage of the Refundable Alternative Minimum Tax (AMT) credit, this is set to expire in 2012. Also, the $1,000 child credit will revert to $500 if the provision is not extended.

Beyond these provisions, there is a laundry list of tax law changes that could occur in 2013 if there is no tax bill passed in 2012 or early 2013. We know there will be at least some change. To know what these changes will be, we need to see how the tax structure shakes out after the election and final congressional session of 2012. That said, the best way for business owners and their families to prepare is to plan carefully, including working out several tax scenarios. Then, wait to act until there is a clearer picture of 2013 tax legislation.

Last but not least, remember, there is an opportunity to transfer significant family wealth without incurring gift tax before the end of the year, and those opportunities might go away if the estate/gift tax structure is not extended. <<

CATHY GOLDSTICKER, CPA, is a member, tax services, at Brown Smith Wallace LLC, St. Louis, MO. Reach her at cgoldsticker@bswllc.com or (314) 983-1274. ROBIN BELL, CPA, is a member, tax services, at Brown Smith Wallace. Reach her at rbell@bswllc.com or (314) 983-1217.

© 2012 Smart Business Network Inc. Reprinted from the November 2012 issue of Smart Business St. Louis.

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