First, two basic principles can help guide your overall thinking:
- If you expect your tax rate will be higher in 2013, you may benefit from accelerating income into 2012 and deferring deductions into 2013.
- If you think your tax rate might be lower next year or will be unchanged, consider deferring income to 2013 and accelerating deductions into 2012.
Remember, the focus is on your marginal tax rate. That is the highest rate at which your last, or marginal, dollar of income will be taxed. Even though overall tax rates may rise in the future, if your income will be substantially lower in 2013 than in 2012, your marginal tax rate may decrease because of our graduated tax bracket system.
A Proactive Approach to Your 2013 Tax Planning
- Accelerate or defer compensation or billings depending on your 2012 and 2013 earnings expectations.
- Consider your short-term and long-term capital gains rates. Be sure to include any prior year capital loss carry-forwards.
- Look closely at any installment sales (example: selling a home through a land contract) to determine the effect on current and future years.
- Use credit cards to pay for tax-deductible expenditures—including charitable deductions in 2012. You will get the deduction this year even if you don’t pay for it until 2013. Consider any suspended passive activity losses you may have.
- Look at contributing appreciated assets to fulfill charitable obligations.
- There are several tax credits available for fuel-saving or alternative-fuel technology vehicles.
- Try to maximize the zero percent capital gain and dividend income you may qualify for in 2012.
- Pay any fourth quarter state or city estimated tax payments in 2012 if you can itemize your deductions.
- Always factor in any potential Alternative Minimum Taxes (AMT). An increasing number of middle-income earners and retirees are being subjected to the AMT.
- Consider maximizing your retirement plan and/or IRA contributions.
- See if making a Roth conversion makes sense for you this year.
- A part of your estate planning may include some gift planning. The annual gift exclusion remains at $13,000.
Consider a year-end meeting with your tax advisor like your annual physical—you may not look forward to it, but you always feel better after it’s over.
Scheduling a year-end meeting with your tax advisor can be of great benefit—but, what about your small business clients? Don’t forget to help give them a head-start on the New Year. Advising your business clients to plan for the upcoming tax season demonstrates that you are invested in their overall success, are thinking about managing their legal (and financial) issues proactively, and keeps you fresh in their mind.
Considerations for Small Business Owners
- Reevaluate, or establish, the company’s retirement plan. Some plans need to be established prior to 12/31/12, even though they may not be funded until 2013. In addition to gaining significant tax savings, some retirement plans offer the potential to receive a tax credit.
- Consider how to depreciate any assets you purchased. Evaluate both the Section 179 option (ability to immediately write-off up to $139,000) and the Bonus Depreciation option (which gives the ability to write-off up to 50% of the asset purchase price).
- Determine if a Cost Segregation study should be conducted. Buildings and other real estate may not qualify for the above-mentioned accelerated depreciation treatments. However, land improvements and qualified leasehold improvements have special depreciation rules.
- Make sure you do not miss any of the available research and development tax credits.
- Make sure you do not miss taking the health insurance tax credits which were offered for the first time in 2012.
- Review your new hires in 2012 to see if they qualify for any of the employment credits available in 2012.
- If you own a pass-through entity (LLC, partnership, or S corporation) and expect to show a loss this year you need to determine if you can take the loss on your personal tax return.
- Should any dividends be paid (if you own a C corporation)?
- Now is a good time of year to review your company’s financial ratios.
Expiring Provisions for Businesses
- Bonus Depreciation—50 percent deductions of qualified capital assets (typically “new” assets) placed in service in 2012 is currently allowed. Bonus Depreciation is set to expire, and will not be available for assets placed in service in 2013.
- Section 179 Depreciation—For 2012, the global asset expensing limitation for qualifying (typically new or used) capital assets is set at $139,000, which decreases to $25,000 in 2013.
Additional Taxes Coming in 2013
Some future tax changes have already been enacted but have yet to take effect:
- Effective January 1, 2013, a new Medicare Hospital Insurance (HI) tax applies to high income individual taxpayers.
- The Medicare Hospital Insurance tax is 0.9 percent of earned income in excess of $200,000 for single filers ($250,000 for joint returns).
- A 3.8 percent tax applies to investment income (including dividends, annuities, royalties, and rents, etc.) for the same individuals. Consider talking with your tax adviser about strategies for minimizing this tax.
- In 2013, the threshold for the itemized deduction for unreimbursed medical expenses is increased to 10 percent of adjusted gross income from the current 7.5 percent. You may want to plan for unreimbursed medical procedures in 2012 to maximize your tax benefit. There is a break for older taxpayers. If an individual or spouse is 65 or older, the threshold remains at 7.5 percent of adjusted gross income through 2016.
Year-end planning typically revolves around the deferral or acceleration of income and/or expenses to take advantage of either a “sunsetting” provision or a new upcoming tax law, which may also entail a change in tax brackets. Being proactive, especially in today’s uncertain economic times, can reap some huge tax savings for your clients and your book of business for 2013.