By Mark Buescher, C.P.A.
The new year is in full swing in Madison and it’s time to look forward to the rest of 2012. For tax planning purposes, you might want to look forward to 2013 as well, so you’re ready for federal tax law changes – those presently scheduled to arrive and those likely to be implemented.
For both types, early planning that incorporates strategies for reducing the impact of higher tax rates is a smart move. Why? One reason is the possibility of increased capital gain and ordinary income tax rates in 2013, after current rules expire.
Another is the 2010 health care laws, which introduced two new surtaxes slated to kick in next January. These taxes apply to wages, self-employment, and investment income. There are certain moves to consider now to offset the impact of changes currently scheduled to begin in 2013.
First, make smart investment decisions. As you make investment decisions during 2012, look for ways to take advantage of this year’s maximum long-term capital gain rate of 15%. For instance, you might sell appreciated assets before year-end and postpone selling those with losses until 2013.
When your modified adjusted gross income exceeds $250,000 on a joint return ($200,000 when you’re single), accelerating gains and deferring losses will mitigate the impact of the new 3.8% Medicare surtax on unearned income. This tax is scheduled to take effect January 1, 2013, and it applies to interest, dividends, rents, royalties, annuities, and capital gains in addition to the regular capital gain tax.
Perhaps you believe a stock in your portfolio has the potential for additional appreciation over the next year or two. Review your overall investment strategy, trans- action costs, and your tax bracket, and determine if it makes sense to sell the stock this year and immediately re-purchase it.
The result? You pay tax on your 2012 tax return for the gain already accrued, and you end up with increased basis in the future year when you’re ready to liquidate your stake. Higher basis means lower taxable gain and less tax.
Another thought as we look ahead: plan for higher taxes on dividends. Remember, too, under present rules dividends will no longer qualify for favorable capital gain rates after 2012. Instead, they’ll be taxed as ordinary income. If you are the owner of a C corporation, you might want to distribute dividends to yourself and your shareholders before year-end.
While double taxation of dividends can be a concern, the strategy can be especially effective if you qualify for the 10% or 15% tax brackets, where the applicable capital gain rate for 2012 is zero. When you’re married filing jointly, those brackets – and the zero percent rate – apply to taxable income of up to $70,700 for 2012.
Another way to prepare for higher capital gain rates is to shift your investments to assets that generate tax-exempt income, such as municipal bonds. Tax-exempt income is not part of the calculation when figuring the surtax on unearned income.
Setting up a retirement plan for your business in 2012 is another sound move. Contributing to a qualified plan gives you a double benefit in the future, when the Medicare surtax on net investment income takes effect. Benefit one: The contributions are made pre-tax. That can help keep your modified AGI below the $200,000/ $250,000 threshold imposed by the surtax. Benefit two: Qualified withdrawals you take after you retire are not subject to the surtax.
With the current tax rates scheduled to end after December 31, 2012, this year becomes a critical one for tax planning. The general expectation is that rates will go higher in 2013, at least for wealthier taxpayers.
The coming tax changes are comprehensive and your tax-saving plan needs to be comprehensive as well. The earlier you start, the easier it will be to make adjustments throughout the year as the law and your tax situation evolves.
Mark Buescher, CPA is owner and principal of Buescher and Ruff, LLC, a local full service accounting firm in Madison, specializing in tax preparation, business consulting and tax planning. Tax laws contain varying effective dates and numerous limitations and exemptions that cannot be summarized easily. For details and guidance for your specific situation, contact your tax advisor.