Year-End Tax Planning
(in Uncertain Times)
Updated Oct. 31, 2012
Overview
Where Are We Now?
What Is Scheduled to
Expire?
Year-End Planning Tips
2
Where Are We Now?
What We Do Know …
• 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
4
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
5
Supreme Court Upheld Health Care Reform
• 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
6
Schedule of New Health Care Provisions
Year
Provision
2013
2017
• 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)
• 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
• Increase in medical deduction threshold for taxpayers age 65 and over
2018
• Excise tax on high-cost employer plans
2014
7
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
9
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
Likely that some of the expiring
provisions may not be extended
10
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
11
3.8% Medicare Tax Starts Jan. 1
• The rules
• What is subject to the new tax?
• What is not subject to the new tax?
12
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
13
Start Now!
• Don’t wait
• Have a Plan A and a Plan B
• Use multiple scenarios
14
Why Projections?
• Better handle on cash flow
• Lower risk of overpaying estimated taxes
• Improved income tax planning
15
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?
16
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
18
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)
19
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?
20
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)
21
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!
22
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
23
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?
24
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
25
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
26
Trust and Estate Issues
• Change in rules
• Annual gifting
• Direct payments for medical,
education, etc.
• Other year-end planning moves
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Questions
Copyright © 2011 American Institute of CPAs
Copyright © 2011 American Institute of CPAs