CARL WATTS & ASSOCIATES

December 03, 2012

www.carlwatts.com
office@carlwatts.com
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2012 Year-End
Tax Summary
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These are only some of the possible changes that 2013 may bring.

As unpredictable as what will happen next year is, there are some strategies that should be considered for any year end tax planning.

Specialists advice taxpayers to focus on what is known, maximize breaks while they still exist, reduce vulnerability to unknowns without acting rashly and, above all, stay flexible.

So what can you do now?

Contrary to traditional year-end planning, certain high-income taxpayers may want to consider accelerating income into 2012 rather than deferring income into the probable higher tax rates of 2013, and also postponing some payments for next year.
Here are some suggestions on what you can do under these circumstances:

Receive bonuses before January;
Sell appreciated assets;
Redeem U.S. Savings Bonds;
Declare special dividend;
Complete Roth conversions;
Accelerate debt forgiveness income;
Maximize retirement distributions;
Accelerate billing and collections;
Take corporate liquidation distributions in 2012;
Make an extra mortgage payment, or pay down principal;

Maximize contributions to employer-sponsored retirement plans;

Use up funds in a medical flexible-spending account (next year the contribution limit will be $2,500, less than some employers now allow);

Accelerate medical expenses;

Set up a health savings account for 2012. Qualified taxpayers can make 2012 contributions to HSAs as late as April 15, 2013, but the account has to exist by year end;

Write next semester's tuition checks before year end;

Prepay state taxes;

Make gifts up to $13,000 to relatives or friends. The $13,000 can be given to one person or any number of people. If you are married, the amount increases to $26,000;

Contribute to 529 education savings accounts;
Make charitable gifts;
Postpone bill payments until 2013;
Pay last state estimated tax installment in 2013.

In following any general advise on how to plan for the tax year-end, please first consider if there are any foreseeable changes in your income for the following year and if any of the tips you read or hear about applies favorably to your own financial status.

Of course, professional help is more than advisable especially in such complicated and uncertain tax situations as this tax year-end poses.



A few more weeks and we can enjoy the new year fireworks, but before that, you need to make sure you take advantage of all tax opportunities that may expire or change as soon as next year begins.

The so called “Bush-era” tax cuts is the collective term used for the tax measures enacted in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA).

EGTRRA and JGTRRA made over 30 major changes to the Tax Code that are scheduled to expire at the end of 2012. 

Unless extended further, the reduced individual income tax rates will disappear after 2012 to be replaced by higher rates. The current 10, 15, 25, 28, 33 and 35 percent rate structure would be replaced by the higher pre-Bush 15, 28, 31, 36 and 39.6 percent rates.

Unless Congress takes action, the tax rates on qualified capital gains and dividends are also scheduled to increase significantly after 2012. The current favorable rates of 0% for taxpayers in the 10 and 15 percent brackets and 15% for all other taxpayers will be replaced by pre-2003 rates of 10% for taxpayers in the 15% bracket and a maximum 20% rate for all others.

In addition, dividends will be subject to the ordinary income tax rates. The maximum rate on five-year property will be 18% (8% for those in the 15% bracket).

As of 2013, a 3.8% Medicare surtax will be imposed on the Net Investment Income (NII) and will generally apply to passive income and capital gains from the disposition of property. However, the Medicare surtax will not apply to income derived from a trade or business, or from the sale of property used in a trade or business. The Medicare surtax is based on the lesser of the taxpayer’s NII or the amount of modified adjusted gross income (MAGI) above thresholds of $250,000 for married filing jointly and $200,000 for singles. 

Also effective January 1, 2103, there will be an additional 0.9 percent HI (Medicare) tax for higher income individuals . This additional Medicare tax means that the portion of wages received in connection with employment in excess of $200,000 (and $250,000 for married couples filing jointly) will be subject to a 2.35% Medicare tax rate. The additional Medicare tax is also applicable for the self-employed.


For the last couple of years, the employee’s share of Old Age, Survivors and Disability Insurance (OASDI) taxes has been reduced from 6.2% to 4.2%. On January 1, 2013, the employee’s share of OASDI taxes will revert to 6.2 percent; effectively increasing payroll taxes across the board.

Higher income taxpayers may be subject to the return of the personal exemption phaseout and the so-called Pease limitation on itemized deductions. Revival of the personal exemption phaseout rules would reduce or eliminate the deduction for personal exemptions for higher income taxpayers starting at phaseout amounts that would start at $267,200 AGI for joint filers and $178,150 for single filers.

In addition, return of the Pease limitation on itemized deductions would reduce itemized deductions by the lesser of:

-
3% of the amount of the taxpayer’s AGI in excess of a threshold inflation-adjusted amount projected for 2013 to be $178,150, or

-
80 percent of the itemized deductions otherwise allowable for the tax year.

The threshold for deducting medical expenses, now 7.5% of AGI (10% for AMT payers), rises to 10% next year for most taxpayers.
People who are 65 and older, however, can use the 7.5% threshold through 2016. This phase-in will be useful as many taxpayers claiming large medical deductions are in the later years of life.

The American Opportunity Tax Credit temporary enhancements, including a maximum credit of $2,500, availability of the credit for the first four years of post-secondary education, and partial re-fundability for qualified taxpayers, are scheduled to expire after 2012. Under current law, less generous amounts will be available with the revived Hope education credit.

Coverdell Education Savings Accounts, currently with a maximum annual contribution of $2,000, is scheduled to decrease to $500 after 2012.

Taxpayers with MAGI below $75,000 ($150,000 for married filing jointly) are currently eligible to deduct interest paid on qualified education loans up to a maximum deduction of $2,500, subject to income phase out rules. The enhanced treatment for the student loan interest deduction is scheduled to expire after 2012.

The child tax credit set at $1,000 per eligible child for 2012, will be $500 per eligible child, effective January 1, 2103.

Before 2012, qualified taxpayers could deduct state and local general sales taxes in lieu of deducting state and local income taxes. Unless extended again, the deduction for state and local general sales taxes will not be available for tax year 2012 and beyond.