2012 Year End Tax Strategies
November 8, 2012
Tax time is just around the corner. The following 2012 year end tax planning strategies may prove beneficial for you and your business.
Individuals
The Basics
- If you expect your tax rates to be higher next year, it may make sense to accelerate income into this year and defer deductions into next year.
- If you think your tax rate might be lower next year, consider deferring income to next year and accelerating deductions into this year.
Alternative Minimum Tax (AMT)
- Fewer deductions are allowed for AMT. If you expect to pay AMT in one year and not the other, you may want to shift deductions into the non-AMT year.
- When evaluating specific items of income or deduction, you need to consider the most common contributing factors of AMT. This would include the payment of state and real estate taxes, Incentive Stock Options (ISOs), and miscellaneous itemized deductions (tax prep fees, investment management fees, etc.).
Capital Gains and Losses
- Consider harvesting capital losses at year end to offset capital gains recognized during the year.
- When selling securities to recognize a capital loss, watch the wash sale rules. A wash sale occurs when you repurchase substantially identical assets within 30 days prior to your loss sale.
Charitable Contributions
- Consider contributing appreciated securities instead of cash. You can deduct the fair market value of long-term capital gain property even though your basis in that security might be significantly less. You also avoid taxes on the gain that would be recognized if you sold the security and donated the proceeds.
Funding Your Retirement Plans
- To qualify for a deduction in 2012, your retirement plan generally must be in place before the end of the year, although some must be set up sooner. Exceptions are IRAs and SEP (simplified employee pensions) plans.
Roth IRA Conversion
- Convert your traditional IRA into a Roth IRA if doing so is expected to produce better long-term tax results for you and your beneficiaries. Distributions from a Roth IRA can be tax-free but the conversion will increase your adjusted gross income for 2012.
Gift Tax
- Make annual exclusion gifts before year end. You can give $13,000 in 2012 to an unlimited number of individuals, free of gift tax. Additionally, if an income-earning property is given to family members who are in a lower income tax bracket, provided they are not subject to the Kiddie tax*, the transfer may offer the family members income tax relief.
* Kiddie Tax: If a child’s interest plus dividends plus other investment income total more than $1,900, part of the child’s income will be taxed at the parent’s tax rate instead of the child’s tax rate. It doesn’t include income the child earned from a job or self-employment.
529 Plans
- 529 plans are vehicles used to fund education expenses. The earnings are tax deferred and potentially tax free if used for qualified educational expenses. Also, many states offer a state tax deduction for the amount contributed to a 529 state plan.
Businesses
Section 179 Deduction
- The section 179 deduction allows the expensing of all or a portion of certain qualifying assets in the year placed in service. The amount available for expensing under section 179 is $139,000.
- There are two key limits to watch for:
- The Section 179 deduction cannot exceed your taxable income from business activities.
- The maximum deduction is reduced on a dollar-for-dollar basis for acquisitions over an annual threshold of $560,000 for tax year 2012.
Bonus Depreciation
- Property that does not qualify for an immediate tax write-off under Section 179 may qualify for an increased first-year depreciation deduction under bonus depreciation. The bonus depreciation is equal to 50 percent of the cost of qualifying property purchased and placed in service by December 31, 2012. The property must be new and have a tax useful life of 20 years or less.
For more information on how these strategies may impact your specific situation, please contact your relationship manager or a member of our Wealth Advisory or Portfolio Management team at 303.531.8100.
