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Monthly Tax Tip: More Tax Planning Considerations

Author: Robb A. Longman Date: 09/28/2012

Categories: Tax Services

2012 will be coming to an end before you know it, along with the expiration of numerous tax savings provisions. It is important to review the current benefits under the tax code to maximize your savings. This Tax Tip provides guidance on what to expect in 2013 and what you might do about it in 2012. The current tax code advantages and expected changes include the following:

  • The lifetime exclusion allows individuals to gift their assets without incurring gift taxes. It is currently set at $5 million. However, it is expected to decrease to only $1 million in 2013. Even if your total assets do not equal the $5 million exemption currently available, it may still be beneficial to take advantage of the large exemption amount to help minimize any future estate taxes.
  • Limitations on charitable giving will return in 2013. Under current law, the so-called “Pease limitation” (named for the member of Congress who sponsored the law) is scheduled to be revived after 2012. The Pease limitation requires high income individuals to reduce their tax deductions by certain amounts, including their charitable deductions. Depending on your individual financial circumstances, charitable contributions should be made this year to take full advantage of existing laws.
  • 2012 is also a good time to consider “tax loss harvesting” strategies to offset current gains or to accumulate losses to offset future gains (which may be taxed at a higher rate). Because you must balance short-term gains and losses with corresponding long-term gains and losses, the first consideration is to identify if an investment qualifies for either short or long-term capital gains status.
  • Code Sec. 179 gives some businesses an option to claim a deduction for the full cost of qualified property in the first year of use rather than requiring depreciation to be taken over a period of years. The limitation for 2012 is $139,000, with a $560,000 investment ceiling. The Code Sec. 179 dollar limit is scheduled to drop to $25,000 for 2013 with a $200,000 investment ceiling. Businesses should consider making purchases in 2012 to take advantage of the current Code Sec. 179 expensing rules. Qualified property must be tangible personal property which you actively use in your business and for which a depreciation deduction would be allowed. Qualified property must also be purchased in 2012 and can be either new or used property, but cannot be property that you previously owned and converted to business use. Provided that you begin using your newly-purchased business equipment before the end of the tax year, you qualify for the entire deduction. The amount that can be expensed is determined by the date on which the qualified property is placed in service and not when the qualified property is purchased or paid for.
  • The first-year 50 percent (50%) bonus depreciation deduction is scheduled to expire after 2012 (2013 in the case of certain longer-production period property and certain transportation property). Unlike the Section 179 expense deduction, the bonus depreciation deduction is not limited to smaller companies or capped at a certain dollar level. To be eligible for bonus depreciation, qualified property must be depreciable under the Modified Accelerated Cost Recovery System (MACRS) and have a recovery period of twenty (20) years or less. The property must be new and placed in service before January 1, 2013.
  • Under current law, tax-favorable tax rates on dividends are scheduled to expire after 2012. Qualified dividends are eligible for a maximum 20% tax rate for taxpayers in the 25% tax and higher brackets, and 0% for taxpayers in the 10% and 15% tax brackets. In July, the House voted to extend the current dividend tax treatment through 2013. The Senate, however, voted to extend the current tax favorable rates but only for individuals with incomes below $200,000 (families with incomes below $250,000). For incomes in excess of $200,000/$250,000 the tax rate on qualified dividends would be 20%. If Congress takes no action, qualified dividends will be taxed at the ordinary income tax rates after 2012 (with the highest rate scheduled to be 39.6% not taking into account the 3.8% Medicare contribution tax for higher income individuals). Qualified corporations may want to explore declaring a special dividend to shareholders before January 1, 2013.
  • In 2013, two new taxes kick-in. The Patient Protection and Affordable Care Act (PPACA) imposes an additional 0.9% Medicare tax on wages and self-employment income and a 3.8% Medicare contribution tax. The 3.8% Medicare contribution tax will apply after 2012 to single individuals with a modified adjusted gross income (“MAGI”) in excess of $200,000 and married taxpayers with a MAGI in excess of $250,000. MAGI, for purposes of the Medicare contribution tax, includes wages, salaries, tips, and other compensation, dividend and interest income, business and farm income, realized capital gains, and income from a variety of other passive activities and certain foreign earned income.
  • Because of the increases in tax rates, taxpayers may want to recognize income in 2012 when lower tax rates are available instead of shifting income to a future year. Another valuable year-end strategy is to “run the numbers” for regular tax liability and AMT liability. Taxpayers may want to explore if certain deductions should be more evenly divided between 2012 and 2013, and which deductions may qualify or will not be as valuable for AMT purposes.
  • The Maryland Homestead Tax Credit is no longer automatic and an application must be filed before December 31, 2012 in order for a homeowner to be eligible to receive the credit. The application can be found at http://sdathtc.resiusa.org/homestead/

Doing nothing or adopting a wait-and-see attitude may be tempting, but could be costly. Instead, multi-year tax planning, which takes into account a variety of possible scenarios and outcomes, should be built into your approach. You should consult your tax advisor or call us for more details on developing a tax strategy that includes tax-advantaged steps that may be taken before you hear Auld Lang Syne again.

IRS CIRCULAR 230 DISCLOSURE To ensure compliance with requirements imposed by the U.S. Internal Revenue Service, we inform you that any tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, by any taxpayer for the purpose of (1) avoiding tax-related penalties under the U.S. Internal Revenue Code or (2) promoting, marketing, or recommending to another party any tax-related matters addressed herein.