By Kevin Carmichael, MS, JD, LLM, CPA –
We are less than 90 days from the end of 2012 and that means it’s time to focus on year-end tax strategies. This year is the most challenging we have faced in several years because of the so-called “Fiscal Cliff.” The Fiscal Cliff is loosely defined as the aggregate economic effects resulting from the simultaneous expiration of the 2010 extension of the Bush Era tax cuts, the tax increases mandated by the Affordable Care Act and the spending cuts that are scheduled to go into effect January 1.
These are the maximum rates that are presently applicable or will go into effect for high income earners on January 1, 2013. According to Congress, the high income category of filers begins at $200,000 for single individuals and $250,000 for married persons filing jointly.
If you are in the high income category or fairly close, you should consider the following strategies before year end:
1. If you own investment grade securities, considered selling and reinvesting a portion of your portfolio before year end to harvest capital gains. Long term capital gains are taxable at 15% in 2012 but will be taxable at 23.8% in 2013.
2. Review your taxable fixed income strategy and consider whether it is in your interest to lower your exposure to taxable dividends, interest and the impeding increase in tax rates.
Accelerate Itemized Deductions and
Income into 2012
If you have installment obligations with deferred capital gains, make an election to accelerate those gains into 2012, so that the tax will be paid at 15%. If you have any collectable receivables, accrued bonuses or stock options, try and collect them or exercise them prior to year end.
Itemized deductions will return to the phase out rules which were in place a decade ago making such deductions less valuable. Consider methods of moving those deductions into this year.
Prepay amounts into your Health Savings Account before year end to take advantage of the higher permitted contribution levels.
Estate and Gift Tax Planning
If you have not done estate planning or have only done estate planning, you should consider trying to take advantage of using all or a portion of the available $5,120,000 exemption equivalent for gift, estate and generation skipping tax purposes prior to year end. The exemption will decrease to $1,000,000 after December 31, 2012. Even if you have engaged in some planning and used your exemption, it may make sense to make taxable gifts to children and grandchildren and pay a 35% tax, which is in effect until December 31. After December 31 the tax rate goes back to 55%.
If you have engaged in advanced estate planning that has not gone particularly well, for example failed GRATs or sales of assets to irrevocable trusts, now is the time to review and readjust your strategies. The tax rates and interest rates are at historic lows, so it will never be cheaper to fix them. There are many strategies to fix GRATs, QPRTs and other irrevocable trusts.
If you created an irrevocable trust in Florida or are the trustee or beneficiary of an irrevocable trust created in Florida that is not operating as intended or whose purpose has been frustrated, consider taking advantage of the relaxed judicial and non-judicial trust modification rules available under Florida law.
If you have created or are the trustee or beneficiary of an irrevocable trust, you should review your investment strategies in light of the imposition of a 3.8% Medicare tax on undistributed investment earnings in excess of $11,900.
Business Issues
Most of the accelerated depreciation deductions available for the acquisition of property used in a trade or business are expiring at the end of this year. If you foresee the need for new property or equipment in the next 18 months, it may be in your interest to acquire that property now, while favorable depreciation schemes are in place.
If you are an investor in real property through a partnership or LLC, consider becoming an active participant in your real estate LLC or partnership to avoid the increased 3.8% Medicare tax beginning in 2013, which will be applicable to passive income such as rent.
The comments expressed herein are intended for general informational purposes only and should not be relied upon as legal advice. Please consult legal counsel to obtain specific advice for your situation.
Kevin Carmichael MS JD LLM CPA, is a Tax Partner with the Naples office of Salvatori Wood and Buckel. His practice focuses primarily on issues of business, tax, not for profit, estate planning and business succession planning law. He is a founding director and Chairman of the Center for Great Apes in Wauchula Florida. He taught business law and cost accounting as an Adjunct Professor at Florida Gulf Coast University for 6 years. He is presently an Adjunct Professor of Tax law at Ave Maria University Law School. He can be reached at (239) 552-4100.