Midyear Tax Planning
August 2012
Dear Client,
     The year 2012 may be the most favorable tax environment you will experience for the rest of your life. Now is the time to take advantage because we don't know what tax rates will be in 2013 and beyond. This newsletter presents some tax planning ideas to consider this summer while you have time to think. Some of the ideas may apply to you, some to family members, and others to your business.
Tax Planning Paradigm Shift for 2012
Accelerating Income
This may be our best tax planning idea for 2012!      
   
     Typically, we suggest that you may want to defer current year income to a later year and recognize it then, thus also deferring the tax liability, however based on the current tax rates and the tax rates for 2013, you may want to accelerate some income and move it into 2012. See the table below for 2012 and 2013 tax rates for people filing "married filing jointly" (MFJ):     
   

2012

2013

Tax 

Rate

 

Taxable Income

Tax Rate

 

Taxable Income

10%

$0-$17,399

10%

n/a

15%

$17,400-$70,699

15%

$0-$56,849

25%

$70,700-$142,699

28%

$56,850-$137,049

28%

$142,700-$217,449

31%

$137,050-$209,249

33%

$217,450-$388,349

36%

$209,250-$373,649

35%

$388,350 +

39.6%

$373,650 +

     
     As you noted in the table above, for 2013 there is no longer a 10% tax bracket, the result is that all taxable income up to $56,850 will be taxed at 15%.  Additionally, the 25% bracket for 2012 becomes a 28% bracket for 2013, and it starts at almost $14,000 less of taxable income for MFJ filers.  

     All the tax brackets increase as follows: 28% bracket for 2012 is replaced with 31% in 2013, 33% in 2012 is replaced with 36%, and the 35% bracket becomes a 39.6% bracket.

      These brackets will mean a significant increase in tax liability for taxpayers in 2013 over 2012.  For example, for a married filing joint taxpayer with $200,000 of taxable income in both 2012 and 2013, in 2012 their federal tax liability would be $43,779, and in 2013 their tax liability would be $50,498, approximately $7,000 higher!
Standard Deduction
Leverage Standard Deduction by Bunching Deductible Expenditures
     Are your 2012 itemized deductions likely to be just under, or just over, the standard deduction amount? If so, consider the strategy of bunching together expenditures for itemized deduction items every other year, while claiming the standard deduction in the intervening years. The 2012 standard deduction for married joint filers is $11,900; the magic number for single and married filing separate filers is $5,950; it's $8,700 for heads of households.     

     For example, say you're a joint filer whose only itemized deductions are about $4,000 of annual property taxes and about $8,000 of home mortgage interest. If you prepay your 2013 property taxes by December 31 of this year, you could claim $16,000 of itemized deductions on your 2012 return ($4,000 of 2012 property taxes, plus another $4,000 for the 2013 property tax bill, plus the $8,000 of mortgage interest). Next year, you would only have the $8,000 of interest, but you could claim the standard deduction (it will probably be around $12,500 for 2013). 


     Following this strategy will cut your taxable income by a meaningful amount over the two-year period (this year and next). You can repeat the drill all over again in future years. 

     Examples of other deductible items that can be bunched together every other year to lower your taxes include charitable donations and state income tax payments.
Investment Gains & Losses
Plan Investment Gains & Losses and Consider Being BOLD 
     As you evaluate investments held in your taxable brokerage firm accounts, consider the impact of selling appreciated securities this year. The maximum federal income tax rate on long-term capital gains from 2012 sales is only 15%. 

     Therefore, it often makes sense to hold appreciated securities for at least a year and a day before selling. On the other hand, now may be a good time to cash in some long-term winners to benefit from today's historically low capital gains tax rates. 

     Biting the bullet and selling some loser securities (currently worth less than you paid for them) before year-end can also be a good idea. The resulting capital losses will offset capital gains from other sales this year, including short-term gains from securities owned for one year or less that would otherwise be taxed at ordinary income tax rates. The bottom line is that you don't have to worry about paying a higher tax rate on short-term gains if you have enough capital losses to shelter them.  


     If capital losses for this year exceed capital gains, you will have a net capital loss for 2012. You can use that net capital loss to shelter up to $3,000 of this year's high-taxed ordinary income from salaries, bonuses, self-employment, and so forth ($1,500 if you're married and file separately). Any excess net capital loss is carried forward to next year.


     Important Point: Selling enough loser securities to create a bigger net capital loss that exceeds what you can use this year might make sense. You can carry forward the excess net capital loss to 2013 and later years and use it to shelter both short-term gains and long-term gains recognized in those years. That will give you extra investing flexibility in 2013 and beyond because you won't have to hold appreciated securities for over a year to get better tax results. 

 

     Remember: The maximum federal income tax rate on long-term capital gains is scheduled to increase to 20% starting in 2013 (up from the current 15%) while the maximum rate on short-term gains is scheduled to increase to 39.6% (up from the current 35%). Contact us if you want help in identifying the best tax-smart options in a world where future tax rates are uncertain.  

 

     All that said it is always wise to buy and sell stocks when the economics of the purchase or sale are maximized.  Income taxes are just one of the items to consider. 
Business Tax Breaks
Take Advantage of Generous but Temporary Business Tax Breaks

     Several favorable business tax provisions may expire shortly thus possibly dictating that you or your business take some action between now and year end. They include the following: 

     Bigger Section 179 Deduction. Your business may be able to take advantage of the temporarily increased Section 179 deduction. Under the Section 179 deduction privilege, an eligible business can often claim first-year depreciation write-offs for the entire cost of new and used equipment and software additions. 

 

     For tax years beginning in 2012, the maximum Section 179 deduction is $139,000. For tax years beginning in 2013, however, the maximum deduction is scheduled to drop back to only $25,000.  Thus consider year end purchases of assets if you believe your 2013 asset purchases may exceed $25,000.
 
     NOTE: Determine if your business is already expected to have a tax loss for the year (or close) before considering any Section 179 deduction.  You cannot claim a Section 179 write-off that would create or increase an overall business tax loss. Please contact us if you think this might be an issue for your operation.  
 
     50% First-year Bonus Depreciation. Above and beyond the Section 179 deduction, your business can also claim first-year bonus depreciation equal to 50% of the cost of most new (not used) equipment and software placed in service by December 31 of this year. 
 
     For a new passenger auto or light truck that's used for business and is subject to the luxury auto depreciation limitations, the 50% bonus depreciation break increases the maximum first-year depreciation deduction by $8,000 for vehicles placed in service this year. The 50% bonus depreciation break will expire at year end unless Congress extends it. 
 
     NOTE: 50% bonus depreciation deductions can create or increase a Net Operating Loss (NOL) for your business's 2012 tax year. You can then carry back the NOL to 2011 to collect a refund of taxes paid in prior years. 
Estate Planning
Don't Overlook Estate Planning
      For 2012, the unified federal gift and estate tax exemption is a historically generous $5,120,000. However, the exemption will drop back to only $1 million in 2013 unless Congress takes action. In addition, the maximum federal estate tax rate for 2013 and beyond is scheduled to rise from the current 35% to a painfully high 55%. 

     Therefore, planning to avoid or minimize the federal estate tax should still be part of your overall financial game plan. Even if you already have a good plan, it may need updating to reflect the current $5.12 million exemption and the uncertainty about next year's rules. Contact us for specifics.
Please contact us with any questions you may have regarding the tax provisions discussed in this email, or if you would like more information.

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Soukup, Bush & Associates, PC 
(970) 223-2727
www.soukupbush.com