Do you consider tax planning as part of your activities in the last few months of each year? Have you started yet for this year? Any advisors out there indicating which way the tide will turn? Many of you knew our much esteemed partner Jack Oppenheimer, who recently passed. His philosophy, which continues still, is plan, plan, plan and thoroughly strategize. The tax return then should display the results.
However, the ever-present economic uncertainty, potential for vast tax changes, and inability of our elected representatives to resolve this are not conducive to a feeling of financial security or well strategized planning.
For the past several years individuals and business owners have spent their energy attempting to maintain their position and keep their expenses in check, particularly as income has yet to stabilize. Now we have the potential for drastic change and fears of the repercussions.
To plan for this year and next is virtually guesswork. Congress is on vacation until Nov. 13; and will only be in session for four weeks before they break for an extended holiday. They notoriously move slowly through any issue. Is there any expectation of significant tax legislation in enough time for you to put into place tax planning opportunities?
You can set the wheels in motion, yet wait to pull the trigger until mid-December, and hope two weeks is enough time. Here are some ideas to keep in mind based on pending changes:
Accelerate long term capital gains into 2012. The tax rates on net long term capital gains remain at historic lows (0 percent if you are in the lowest income tax brackets, and 15 percent if your tax bracket is 25 percent or higher). In 2013, capital gains rates will not only increase, they will also be included in the calculation for the new Medicare surtax of 3.8 percent on unearned income.
Assuming capital gains rates do increase, and the Medicare surtax is not repealed, you may want to consider harvesting capital losses by year end, or into next year. These losses will offset other capital gains, reducing exposure to not only the higher capital gains rate but also the potential effect of the 3.8 percent tax. Make certain you are well versed in the tax implications for short term and long term capital gains prior to taking any action.
Consider ROTH conversions prior to Dec. 31 of this year. The reportable income from a ROTH conversion in 2013 could drive total income into a higher tax bracket than expected as well as cause your income to cross the threshold where the Medicare surtax will apply. (The application is to single filers with income over $200,000 and married filers with income over $250,000.)
In 2013 the old ‘phase-out’ rules come back. This means for higher income individuals, the personal exemption phase out returns as well as the itemized deduction limits (remember losing 3 percent of your itemized deductions because your income level? That returns). Consider making your charitable contributions before Dec. 31, to avoid having any amounts disallowed due to income limits in 2013.
Some items expiring this year or expired at the end of 2011 with the potential for not being extended of which to be aware: education credits for tuition and costs, sales tax deduction, mortgage insurance premium deduction, teacher expenses deduction, and exclusion from income of discharge of ‘qualified principal residence indebtedness.’
This information is not exhaustive. Educate yourself, keep abreast of legislation affecting your taxes, and talk to your professional advisor, be they a CPA or CFP. The better armed you are with information, the better you can strategize.
Janet H. Rapp, CPA – Managing Partner