Year-end tax planning will be more difficult this year. Starting in 2013 individuals will see higher tax rates across the board and several key deduction and credit will disappear.
Some of the credits and deductions that will disappear are the bonus depreciation for business property and the tax credit for higher education and dependent care costs. The phase-out rule that reduces write-offs for the most popular itemized deductions, such as home mortgage interest, state and local taxes, and charitable donations, will return for high income taxpayers in 2013.
Two new medicare taxes kick in in 2013. The new surtax of .9% on wages and self-employment earnings exceeding $200,000 (250k if MFJ, 125k if MFS), There is also a 3.8% medicare contribution tax that applies to the lesser of (1) net investment income, including interest income, dividends, capital gains and “passive” investment income; of (2) MAGI in excess of $200,000 (250k if MFJ; 125k if MFS).
The 2012 federal income tax scenario is more favorable than 2013, so tax planning that takes place between now and then may have a great impact on the final tax bill. Some tax planning ideas are below.
Deferring income to next year may not work as well this year.
This makes sense if you are CONFIDENT you will be in the same or lower bracket next year, then by all means defer. You can control the timing of December invoices by sending them out early (to receive in 2012) or late (to receive in 2013) depending. Same for deductions. Pay the bills now to get the expense in 2012. Some examples are property taxes, equipment purchases, etc.
Ideas for increasing deductions.
Make Charitable gifts of appreciated stock or mutual funds that you have held for more than a year. You won’t pay tax on the appreciation, but will get a deduction for the current value.
Accelerate Itemized Deductions into this year. No phase out this year, but there will be one next year. IF you have the cash, make those state tax payments before the end of the year.
0% rate on investment income.
If you are in the 10 or 15% federal tax bracket, consider taking the gains to the extent you remain in those brackets, no gain on the sale!
Year-end tax selling
The Max federal rate on LT cap gains for 2012 is 15%. That is increasing to 20% in 2013, and the 3.8% will apply for higher earners. If you are thinking about selling, do so before year end. IF you think it may still grow, lock in the 15% gain on the current value by selling, and buy it back!
Year end moves for business
If you are thinking of buying equipment or other fixed assets, consider doing so before year end to get the higher 179 deduction and bonus depreciation.
Maximize retirement contributions and take advantage of Flexible Spending Accounts.
Don’t Forget about Estate Planning
The unified federal gift and estate tax exclusion goes from a historically high 5.12 million to 1 million for 2013. Be sure to update your plan to minimize this.