At the end of 2012, approximately $500 billion in tax breaks will expire unless Congress takes action, but there’s still uncertainty about what federal legislators will do. John G. Ebenger, a tax director at the Boca Raton office of Berkowitz Pollack Brant Advisors and Accountants, says, “Don’t make the mistake of assuming there will be a repeat of 2010 when tax breaks were extended because that may or may not happen.”
Despite the uncertainty, experts say there are tax and estate planning strategies to implement before the end of the year that will not only save you money but also benefit your children and grandchildren. Tax advisers at Berkowitz Pollack Brant in Miami say their broad strategy is “plan for the worst while hoping for the best and be prepared to make some tax planning moves after the November election results are known but before year end.”
Here are some moves to consider before 2012 comes to a close:
Consider giving money and other property up to your lifetime exemption without paying gift taxes while the amount allowed is at an all time high of $5.12 million ($10.24 million for married couples). After 2012, the amount exempt from taxes will revert to $1 million per person, unless a tax change occurs. Steven Cutler, a wills, trusts and estates attorney with the law firm of Hinshaw & Culbertson in Coral Gables, says while you may not consider yourself a millionaire, many assets such as life insurance, homes and retirement accounts can be included in your gross estate and may be subject to federal estate tax when you die.
“This could be a once-in-a-generation opportunity to shift significant wealth to the next generation or generations.”
— Steven Cutler, wills, trusts and estates attorney,
Hinshaw & Culbertson, Coral Gables
If you have any control over when income is received, taking it in 2012 could be the way to go. This income, recognized in 2012, could be taxed at a lower rate and could include a bonus, a business sale or certain accounts receivable. In 2013, tax rates will jump from 35% to 39.6% in the upper tax bracket unless Congress takes action to extend the Bush tax cuts. On the flip side, if you are eligible for deductions, you may want to defer them until next year when your income tax rate is likely to be higher. Property taxes are an example of such a deduction. They can be paid as early as November and as late as March the following year.
“If particularly high taxes are anticipated for 2013, a taxpayer could even double up on the deductions by paying property taxes for two years in 2013.”
— Jennifer Immel, senior wealth planner,
PNC Wealth Management, Naples
» Analyze Your Portfolio
Consider reallocating your investments before year-end for several reasons. This year, investment income will be taxed at relatively favorable rates compared to next year, when capital gains rates may rise.
Jennifer Immel at PNC advises doing some legwork now to uncover whether you may receive capital gains distributions at end of year from mutual funds in your portfolio. “They usually release those estimated gains in November or early December so that should still provide time to decide whether to harvest losses to offset that gain,” Immel says. In addition, beginning in 2013, a new Medicare tax of 3.8% will be applied to investment income for single filers earning more than $200,000 ($250,000 for joint filers). Consider selling stocks that have appreciated and recognizing long-term capital gains or holding onto capital losses and writing them off in 2013. John G. Ebenger of Berkowitz Pollack Brant also advises, when possible, accelerating taxable income such as interest or dividends in 2012 to avoid paying that extra Medicare surtax.
If you are over 70½ and have an individual retirement account, you must take a required minimum distribution. This year, consider making that distribution up to $100,000 tax free to your favorite charity, says Sheri Schultz, a CPA and partner at Fiske and Co. in Plantation. Although this tax-free provision was set to expire at the end of 2011, there is a strong possibility that Congress will retroactively reinstate it for 2012, Schultz says.
“Even if Congress doesn’t reinstate the provision, you can deduct the donation as a charitable gift if you itemize deductions and your income is high enough.”
— Sheri Schultz, CPA/partner, Fiske and Co., Plantation
» Sell Now/Buy Now
If you are considering selling a personal residence in a short sale, put your property on the market now and push hard to sell it by year-end. Normally, you would pay taxes on the amount of the debt reduction. But through the end of 2012, the reduction is not taxable as part of your income. In addition, if you are thinking of buying a big-ticket item such as a boat or car, you will want to do it in the next few months to get the benefit of a deduction for the sales tax you pay. This applies to individuals who itemize and can lower your tax liability, says CPA Sheri Schultz.
If you own a traditional IRA, consider converting it to a Roth IRA. That will allow you to pay the income tax on the value of all or part of the converted assets at today’s lower tax rates. It also will result in tax-free distributions from the account when higher tax rates make that tax-free income more valuable.
“The Roth IRA does not require minimum distribution like a traditional IRA and should provide a better estate plan.”
— John G. Ebenger, tax director,
Berkowitz Pollack Brant, Boca Raton
If you’re the owner of a closely held or family business, you may want to give company stock or transfer an interest in the business to family members or relatives before the end of the year, when there will be a drastic reduction in the federal gift tax exemption, unless Congress votes otherwise. Depending on the type of entity and nature of the business, alternatives include giving an interest outright or moving it into a trust for your heirs. “This is something that can’t wait to the last minute. It takes time to do, and you may need business valuations,” says Steven Cutler of Hinshaw & Culbertson law firm.
» Dole Out Bonuses
Thinking of giving an employee a bonus? You may want to do it before the end of 2012 to take advantage of lower tax rates. Bethany Carr, a Sarasota CPA with Cavanaugh & Co., says a business owner will get the tax advantage even if he declares the bonus in 2012 and waits until March 15, 2013, to pay it. Even more, the employee can benefit, too, if paid in 2012. Depending on an employee’s income, he or she may pay fewer Social Security taxes on the income this year than if you give the bonuses in 2013.
» Fund a Trust
For a business owner, an important step in estate planning is choosing how you are going to transfer ownership. John G. Ebenger at Berkowitz Pollack Brant says consider transferring ownership by funding trusts to take advantage of generation-skipping transfer rules that could get tighter. The assets in a properly structured trust would be available for future generations, exempt from estate taxes. If you’re thinking about doing this, don’t delay. Proposed changes in legislation could impose more limitations in 2013.
Tax breaks make it advantageous to business owners to make some big-ticket purchases this year. Many small and medium-sized businesses will be able to deduct their purchases of items such as machinery, equipment and furniture up to $139,000 and also have the potential for a bonus depreciation deduction of 50% of the costs. This amount is scheduled to go down to $25,000 in 2013.
Entrepreneurs looking to sell their businesses may want to complete the deal by in 2012 and forgo installment sales treatment. Moving up a sale could help you pay fewer taxes if the tax rate on capital gains rises, as it is expected to do.