Monthly Tax Tip: 2012 Tax Planning Considerations

Author: Robb A. Longman Date: 05/31/2012

Categories: Tax Services

With 2012 nearly half over, now is a perfect time to start tax planning for 2013. At the end of 2012, two very important acts from the “Bush-era” tax cuts expire: the Economic Growth Tax Relief Reconciliation Act of 2001 (“EGTRRA”) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (“JGTRRA”). It is unlikely many of these provisions will extend beyond 2012, so it is best for taxpayers to analyze their situations in an effort to minimize their tax liabilities before the tax cuts expire.

Individual Tax Increases

All individuals will be affected by the expiration of the EGTRRA changes because income tax rates will increase. The increase in individual income tax rates will also affect shareholders of S Corporations and partners or members filing partnership tax returns for income taxed at an individual level. While there are recommendations to make certain EGTRRA tax cuts permanent they will not include all income classes. Tax rates for individuals grossing more than $200,000 will still increase.

Increase in Capital Gains

Capital gains taxes are also set to increase to twenty percent (20%) from the current maximum rate of fifteen percent (15%) upon the expiration of JGTRRA. In order to maximize savings, taxpayers should accelerate the sale of certain assets that will produce capital gains, if possible. The sale and payment, however, must occur in year 2012. If any portions of the payments are received after 2012 and JGTRRA expires, those portions will be taxed at the new rate.

Possible S Corporation Changes

Congress recently rejected a proposed bill that would require S corporations, with three or fewer shareholders that earn more than $250,000, to pay self-employment taxes on all income. Although the bill was struck down, it is being reconsidered by Congress and, if passed, it will pose new planning considerations for S corporations.

Resolution of Outstanding Tax Debts

The IRS has expanded its Offer in Compromise program and provides more flexible standards for taxpayers to get a fresh start. Taxpayers can now include student loans and state and local delinquent tax payments as allowable expenses. In addition, allowable living expenses have expanded. These changes afford qualifying taxpayers with past due liabilities the opportunity to settle their IRS debts without paying the full amount.

The end of 2012 will likely bring tax increases for many individuals and businesses unless the government quickly intervenes. It is unlikely however that any of the necessary changes will occur before the year ends, particularly in light of the presidential election. Taxpayers should now take the time to maximize their use of JGTRRA, EGTRRA and, if necessary, the Offer in Compromise program.