Tax Rules-Are Stock Dividends And Land Losses Treated The Same Four End-Of-Year Tax Planning Strategies

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Four End-Of-Year Tax Planning Strategies

Even though it’s not yet November, it is time to start thinking about year-end tax planning strategies for 2012. Spending a little time planning today may allow you save on taxes come April. Now may be the best time to talk to your accountant about taxes since they are not preoccupied. Also, once January 1 rolls around, there is nothing you or your accountant can do to affect the taxes you’ll pay for 2012. Finally, with major tax law changes scheduled for January 1, 2013, year-end tax planning takes on added urgency this year.

Be Prepared for Higher Taxes

Tax rates are set to rise on January 1, 2013. (Of course, Congress could always take steps to change this.) The two big changes for most people will be an increase in ordinary income tax rates and the increase in capital gains and dividend rates. In 2013, tax brackets will return to pre-Bush era rates. For example, the 25% bracket will rise to 28% and the 28% bracket will rise to 31%. In addition, taxes on capital gains will jump from 15% to 20% (some taxpayers will also be subject to an additional 3.8% tax on capital gains income, which I’ll discuss in a future blog). Dividends will return to your normal income tax rate (there will be no more distinction between ordinary and qualified dividends).

New Tax Strategies in 2012

Increasing tax rates call for a new strategy in 2012. Normally, deferring paying tax is the best answer, but this year, accelerating income into 2012 while rates are lower could make sense. Also, if you can postpone certain deductions until 2013 or beyond when tax rates will be higher, you might be able to reduce your tax bill in the future. Discuss the following strategies with your accountant and financial advisor before the end of the year.

Strategy #1: Distribute Excess Company Cash This Year

No matter what your corporate structure, consider distributing excess cash in your company this year instead of holding on to it. Doing so at today’s tax rates saves money, and you can always lend the money back to your company if the cash is needed (if you own a sub S corporations, see Strategy #3 below).

Strategy #2: Take Capital Gains in 2012

If you have investments that qualify for long-term capital gains treatment, consider selling them this year, even if you like the investment and want to buy it back. The 30-day wash sale rule does not apply to gains (just losses) so buying an investment right after selling it for a gain works. And if you are considering selling a business or property with a gain, try to close the sale in 2012; you should also try to get as much of the cash as you can up front in a business sale since extending payments into future years only increases the tax ramifications.

Register for our November 2012 Hot Topic-Year-End Tax Planning Tips

Strategy #3: Issue as Large of a Dividend as Possible

Since dividends will lose their qualified status next year (qualified dividends are only taxed at the 15% rate) those with businesses structured as sub S corporations should consider issuing as large of a dividend as possible before the end of 2012. As mentioned above, you can loan this money back to the company if you need to. But paying 15% tax now instead of 25% later (or maybe even higher, depending on your individual tax bracket in the future) will be worth it.

Strategy #4: Consider Postponing Deductions

Expediting income into 2012 will help you pay taxes at a lower rate. Conversely, postponing deductions into 2013 and beyond might be a better use of those deductions since tax brackets will be higher. Consider holding off on year-end charitable giving and making two years’ worth of gifts in January 2013. Talk to your accountant about paying certain taxes in January instead of prior to the end of 2012. In addition, if you have an elective surgery or other medical expense coming up that might be tax deductible, consider when to schedule the procedure. Medical expense deductions are subject to a floor of 7.5% of adjusted gross income (AGI) in 2012, but the floor will rise to 10% of AGI in 2013. You should talk to your accountant about which year works best for you from a tax perspective.

All the strategies listed above come with two big caveats. First, your personal situation is different, so take time to discuss these issues with your accountant and financial planner. Do not assume that they will call you (even though they should); you might have to be proactive and contact them. Second, Congress could act to hold lower tax rates in place after the election during a lame-duck Congress or they could wait into 2013. Without knowing future tax legislation, you can only make a decision based on what you know today. You should not ignore current opportunities because you assume that Congress or the President will take certain actions. It’s possible that Congress will do nothing, since the increase in tax revenues would help decrease the national deficit.

The opinion of the author is subject to change without notice and must be considered in conjunction with relevant regulation, as well as subsequent changes in the marketplace. Any information from outside resources has been deemed to be reliable but has not necessarily been verified. Each individual has unique circumstances to which this information may or may not be relevant. Under no circumstances will this information constitute an offer to buy or sell and it does not indicate strategy suitability for any particular investor.

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