Year-End Tax Planning(in Uncertain Times)

Updated Oct. 31, 2012

Overview

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Where Are We Now?

What Is Scheduled to Expire?

Year-End Planning Tips

Where Are We Now?

What We Do Know …

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• If Congress does nothing

- Bush tax cuts will expire

- Estate tax extenders will expire

• Super Committee

- Debt ceiling debate

- Required legislation to avoid “automatic” cuts

- Temporary measure but deficit debate continues

- New debt ceiling looming, possibly by November 2012

• Supreme Court validated PPACA

- Health care reform is here to stay

- Changes to tax code started in 2010 and continue to 2014

- Tax return compliance is expanding in scope

Super Committee and Taxes

• Tax reform/revenue raisers

- 11/23/11 and 12/23/11 deadlines

- Tasked with finding $1.5 trillion savings over 10 years

- Result: automatic $1.2 trillion in equal defense and non-defense spending cuts

• What was in play

- Corporate reform

- Bush tax cuts

- Taxing large partnerships

- International repatriation

- Millionaire surtax

• New debt ceiling by November 2012

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Supreme Court Upheld Health Care Reform

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• Significant tax implications as court upheld action to require all individuals to buy health insurance

• Several new tax provisions to pay for new law now in effect

• Additional provisions are scheduled to kick in every year

• Impacts businesses, small and large, and individuals

Schedule of New Health Care Provisions

Year Provision2013 • Flexible spending arrangement the maximum drops to

$2,500 per plan year• New “HI” (hospital insurance tax) on high-income taxpayers• New 3.8% Medicare tax on investment income• Medical care itemized deduction threshold increases to

10% of AGI starting in 2013 (except from 2015–2016)

2014 • States will be required to provide federally approved insurance plans • Premium assistance credit• Excise tax on uninsured individuals• Excise tax on applicable large employers• Insurer reporting requirements• Eligible premiums included in cafeteria plans

2017 • Increase in medical deduction threshold for taxpayers age 65 and over

2018 • Excise tax on high-cost employer plans

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What is Scheduled to Expire?

Key Provisions That Expired in 2011

• Alternative Minimum Tax (AMT) Exemption

• State/local sales tax deduction

• Bonus Depreciation (for 2012) dropped to 50%

• Mortgage insurance premiums deduction

• Student loan interest deductions

• School teacher expenses

• Charitable distributions from IRAs

• Research tax credit

• Section 179 limit dropped to $139,000 for 2012

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Provisions That Expire in 2012

• Income tax brackets (10% goes away, 39.6% returns)

• Long-term capital gains (15% goes to 20%)

• Qualified dividends – 0% / 15% eliminated

• Phase-out of personal exemptions

• Phase-out of itemized deductions

• Marriage penalty

• $1,000 child credit resets to $500

• Section 168 Bonus Depreciation expires

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Likely that some of the expiring provisions may not

be extended

Estate Tax Expiring Provisions

• Estate Taxes

- $1 million exemption?

- 55% maximum estate tax rate?

- No portability of exemption?

• Gift Taxes

- $1 million lifetime exemption?

- 55% maximum rate?

• GST Technical Issues

- 9100 relief

- Default GST allocation for certain trusts

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3.8% Medicare Tax Starts Jan. 1

• The rules

• What is subject to the new tax?

• What is not subject to the new tax?

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Impact of New Tax on Planning

• Applies only if modified AGI exceeds $200K for single and $250K for MFJ

• Don’t forget to consider new tax when calculating 2013 estimated tax payments

• Tax exempt interest is not subject to the tax, so consider if more tax-exempt investments make sense

• Consider income included in AGI that is not subject to the tax

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Start Now!

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• Don’t wait

• Have a Plan A and a Plan B

• Use multiple scenarios

Why Projections?

• Better handle on cash flow

• Lower risk of overpaying estimated taxes

• Improved income tax planning

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Multiple Scenarios – Multiple Years

• What if Romney gets elected? What if Obama stays in office?

• Also, consider the possibility that Congress waits until next year to do something

• Possibility for a 60- or 90-day extension on everything

• Why it is important to consider multiple years?

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Year-End Planning Tips

Investments

• Are you diversified?

- What is held in a taxable account vs. retirement account?

- Consider Muni bonds (to avoid new Medicare tax in 2013)

• Triggering long-term capital gains/losses?

- Some may consider triggering gains if they plan on selling in the near future

- Others will not trigger losses like they normally do at the end of the year

• Accelerating income?

- Not limited to investments, also consider ordinary income

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Other Considerations

• Look at stock options that will expire in 2013 or 2014

- Should you exercise them now?

- Consider other factors (i.e., blackout periods, current FMV, etc.)

- Consider ISOs as well

• Understand how real estate will be treated under new Medicare tax

• Transfers to younger generation (assuming you avoid Kiddie Tax rules)

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Defer Deductions?

• Many factors in making this type of decision

- Alternative Minimum Tax (or AMT)

- Return of phase-in and phase-out rules

- Possible increase in rates

• Not prepaying state income taxes?

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Charitable Contributions

• Phase out of itemized deductions is scheduled to return in 2013!

• A 100% charitable contribution this year (with a maximum rate of 35%) is better than a 20% deduction next year (even if the rate is 39.6% or higher)

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Education Incentives

• American Opportunity Tax Credit expires at end of 2012

• Should students prepay student deduction if they have not maximized the deduction for 2012?

• The 529 plan still is around and is a great option!

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Flexible Spending Accounts

• Health care FSA contribution will be capped at $2,500

• Be sure to use the 2012 amount in full

• It is a “use it or lose it” account

• Consider other FSAs

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Retirement Plans

• Qualified Charitable Distributions from IRAs

- Popular provision

- Should you wait until late in the year … just in case?

- Consider getting the form from your broker and follow the right steps in case they make the rule retroactive

• Maximize 401(k) contribution (always a good bet!)

• Conversions to Roth IRAs

- Know what factors to consider before converting

- Important to consider the right time – is this the year to convert?

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Business Entity Considerations

• Consider paying/declaring dividends for C Corporations or previous C Corporations before the end of 2012

• Bonus Depreciation/Section 179

• Other business-related issues

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Conclusions - Best Tips of All!

• Don’t get caught off guard

- Plan now instead of waiting until the last minute

• Engage your CPA year-round

- Better to ask about tax consequences before engaging in a particular transaction

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Trust and Estate Issues

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• Change in rules

• Annual gifting

• Direct payments for medical, education, etc.

• Other year-end planning moves

Copyright © 2011 American Institute of CPAs

Copyright © 2011 American Institute of CPAs

Questions