Year End Fiscal Cliff Tax Strategies

by BocaRatonCPA on 07:58 AM, 20-Jan-13

CPA Boca Raton


Depending on what, if any, tax legislation Congress has the capacity to enact over the following weeks, we will likely notice a tax increase for 2013 and later years. That said, listed below are some key strategies that ought to be considered.

 

Business Expense Strategies

If you are a cash-basis taxpayer and business owner operating as a possible S corporation, partnership or sole-proprietorship, you pay tax around the business’s net profit in your individual federal tax return. The business enterprise itself does not pay the tax. Therefore, an increase in tax rates will probably affect you. Now it's time to organize because of these tax rate hikes. Specifically, pay attention to whenever you incur deductible business expenses. You might postpone many of these expenses to a future year when tax rates may be higher. On the other hand, businesses with carry-forward losses may benefit more by accelerating income (for the extent possible depending on tax law) into 2012 and deferring expenses to 2013 or later.

 

Local and state Tax Payment Strategies

Taxpayers often have some flexibility in determining when you should make state and local tax payments. Such payments include taxes, property and property taxes. Many of these items may be deductible to suit your needs depending on your tax situation. Take a look at situation to find out whether you've got flexibility to delay these payments into next season. The delayed payment, and subsequent boost in tax deductions, may provide greater tax savings next year if tax rates increase.

 

Timing Charitable Contributions Strategies

When you consider additional 2012 charitable contributions, you ought to project toward 2013. It may be advantageous to split your charitable giving budget between your two years. A charitable deduction (provided that it's not subject to limitation depending on your revenue) may potentially be a little more attractive 2013 in comparison to 2012. After some analysis, you may find it more advantageous to reduce your remaining 2012 charitable contributions and allocate more assets (cash or securities) to your 2013 charitable budget. If you decide to wait for 2013 to produce charitable gifts, you should consider causing them to be with appreciated long-term assets as opposed to cash. Given the prospect of rising tax rates, this tactic needs a second look. Once the method is appropriate, the huge benefits are twofold:

 

When gifting appreciated stock to charity you avoid incurring capital gains taxes around the stock

 

A present to some qualified charity provides a tax deduction, towards the extent it is not limited based on your income.

 

Be sure to discuss this method to insure expenditures are fully deductible.

 

Timing Income

Regarding payments from the employer, consider whether you expect finding a bonus or perhaps a lump sum payment because of retirement or a job transition, and talk with your employer regarding your flexibility in the timing of getting the payment. Some employees are offered transition payment schedules that stretch over several year. This may not be ideal when tax rates are anticipated to increase such as 2013. An assessment of the payment amount, date(s) of receipt and your expected income tax bracket in 2012 and future is important in deciding or negotiating when you should receive this income.

 

Regarding IRA or annuity distributions, taxable distributions from IRAs or annuities are a concern inside a rising-tax-rate environment. In case you are needed to take minimum distributions from a retirement plan, IRA or inherited IRA, you’ll want to factor that into future-tax-year projections. Taking mandatory distributions boosts your taxable income and may require either a boost in your withholding or, perhaps, paying estimated taxes quarterly to avoid an underpayment penalty. If you’re considering taking an elective distribution within the next few years, taking that distribution this year when income tax rates are lower is a great idea. This tactic is particularly timely with regards to potential distributions and recognition of taxable income as a result of a Roth IRA conversion.

 

IRA to a Roth IRA Conversion Strategies

Anyone, regardless of income, can now convert a conventional IRA to some Roth IRA. The advantages of converting would be the potential for tax-free income in retirement and also the capability to pass on assets your heirs can withdraw tax-free after your death. However, you could incur income tax in the year you are making the conversion. Because rates are scheduled to increase on January 1, 2013, if you’re considering converting, you might be better off doing the work this year rather than in 2013.

 

Accelerating Long-Term Capital Gains Strategies

January 1, 2013, may see get rid of historically low long-term capital gains rates. Just how much these rates increases is dependent upon your ordinary taxes rate bracket. Various Congressional proposals have been made that included alternative schedules, by incorporating affecting only higher-bracket taxpayers; however, at this stage they remain that - proposals. Because it stands now, you may find it good for sell appreciated securities or assets that you’ve held for a long time this year to take advantage of this year’s lower capital gains tax rates. This strategy may be particularly appropriate in a few instances: It is possible to take advantage of the current 0% long-term capital gains rate. If your net taxable income, including your long-term capital gains, is lower than $70,700 (joint filers) or $35,350 (single filers) in 2012, you'll be within the 10% or 15% ordinary taxes bracket, and that means you could possibly realize some tax-free long-term capital gains. If the capital gains push you over your threshold, or you have been in a higher tax bracket, then some or all of the gains will be taxed in the 15% long-term capital gains rate.

 

If you hold a concentrated equity position, meaning an amazing position in one stock which has appreciated with time, selling a percentage from the shares and getting other investments with all the proceeds can assist you diversify and reduce the marketplace risk inside your portfolio. If you have other goals that involve recognizing the gain, then you should assess the various ways of help manage the risk of a concentrated position as well as the tax liability which could occur upon selling a purchase. However, because of the limited time frame for 2012’s historically low long-term capital gains tax rates, you may want to you should consider selling some this season. Doing this can help you prevent the potential tax rate increase that is scheduled for long-term capital gains recognized in 2013 and thereafter.

 

In the event you own real-estate or business assets, the upcoming tax rate changes should prompt you to definitely consider the way you are managing those assets. In some instances, the buyer and seller of these assets can structure the sale so that proceeds are paid over multiple tax year. Typically, this plan helps the seller manage their tax liability. However, given that both ordinary income-tax-rates and long-term capital gains tax rates are scheduled to rise in 2013, you might like to attempt to develop a sale, and receive its proceeds, this year. If that's difficult, then perhaps electing away from a payment sale treatment and accelerating the wages recognition all to 2012 may be an alternative.

 

Think ahead before selling if you decide to sell appreciated securities next year to take good thing about the reduced long-term capital gains rates, but be strategic in the method that you take action. For that portion of your portfolio you have designated for long-term goals, review and rebalance your allocation so you are in an improved investment management position in the years ahead. Doing so will allow you to take advantage of 2012’s lower long-term capital gains tax rates, plus future you might need less rebalancing, which should reduce increases in size that you simply realize once the tax rates are higher.

 

 Accelerating Capital Losses Strategies

Typically, investors consider selling investments near year-end to appreciate losses to offset capital gains or as much as $3,000 in ordinary income. However, when you have modest unrealized losses in 2012, and don't anticipate generating sizable capital gains, you might consider waiting to appreciate those losses until 2013.

 

Offsetting long-term capital gains which can be taxed at 20% (the 2013 rate) will provide more tax savings than using the losses to offset gains taxed at 15% (the 2012 rate). You’ll may need to look closely to project any potential capital gains (and don’t forget about long-term capital gains distributions from mutual funds). For investors whose income (including long-term capital gains) influences 10% or 15% tax bracket, harvesting losses won't supply a tax benefit when it only reduces long-term capital gains. Losses in excess of gains will offer you a nominal tax savings at best and may even provide more quality if left in the future.

 

If, on the other hand, you've substantial capital losses or capital loss carry-forwards, it could be hard to consume all of those losses. In this example, it probably will not make sense to postpone offsetting capital gains or waiting to acknowledge gains.

 

Rebalancing Your Portfolio Strategies

In general, a qualified dividend is one paid by a U.S. corporation or an international corporation that trades on a U.S. stock trading game. You may even get a qualified dividend if you hold shares in a mutual fund that invests during these types of corporations.

 

Currently, qualified dividends are taxed in a maximum 15% rate - like long-term capital gains; however, in 2013, they're scheduled to become taxed at ordinary income tax rates, which could be considered a maximum 39.6% rate (and oftentimes yet another 3.8% Obamacare surtax on comfortable living taxpayers). Given this anticipated change, you might want to consider reallocating the portion your portfolio located in taxable accounts while using following strategies.

 

Consider adding growth-stock holdings. If you don’t need current income, you might want to look at the features of shifting a number of your equity allocation to growth stocks. Or you'll reposition some of your tax-deferred account allocation to dividend-paying stocks, in which the dividends will be shielded from current taxation. Having a dividend-paying stock, your total return is based on both growth and income, and the income portion may be taxed as everyday income starting in 2013.

 

In the event you hold a rise stock for a long time, any appreciation inside the stock’s price won't be taxed unless you market it. When this occurs, you'd owe long-term capital gains taxes (so long as you held the stock multiple year), which will be lower than ordinary income rates even after 2012. Because this strategy involves issues surrounding both your long-term asset allocation and taxation, current debts should be implemented to help determine the best technique for your circumstances.

 

Reassess your tax-exempt bond holdings. If you want income, carefully weigh the advantages and disadvantages of tax-exempt bonds versus dividend-paying stocks. With rising tax rates, tax-exempt income might be more desirable. Dividend-paying stocks run the risk of having their dividend reduced or eliminated altogether. Also, tax-exempt bonds are often less volatile than stocks.

 

However, tax-exempt investments have inherent risks. For example, bond investments is probably not also equipped to guard against inflation as stocks. In addition, keep in mind that some municipal bond interest may trigger the AMT tax. Also, bond prices will fluctuate and move inversely to rates of interest. If interest levels increase, your bond investments’ principal value will fall. We recommend continual portfolio monitoring and the outlook for the economy and the markets, so any proactive changes can be created when needed.

 

You’ll want to assess the investment’s yield. At 2012 income-tax-rates, a tax-exempt bond with a 4% yield will be comparable to a taxable investment with a 5.3% yield for an individual inside the 25% federal income tax bracket. If income-tax-rates increase, this same taxpayer would need to look for a taxable investment having a 5.6% yield to generate exactly the same after-tax income since the 4% tax-exempt bond.

 

If you choose to reprogram your portfolio’s investment mix, remember that overall asset allocation remains right for neglect the goals, time horizon and risk tolerance.

 

Medicare Tax on Investment Income Strategies

Beginning in 2013, married filing joint taxpayers with incomes over $250,000 and single taxpayers with incomes over $200,000 will be susceptible to a fresh (Obamacare) Medicare tax. If you’re either in group, yet another 3.8% tax will probably be put on some or your entire investment income, including capital gains. This can be in addition to ordinary and capital gains taxes that you simply already pay!

 

Exercise Employer-Granted Commodity

If the company has granted you investment in your compensation package, you could have either (or both) nonqualified investment (NSOs) or incentive commodity (ISOs). You will want to understand the choices you've got and also the tax consequences of exercising every type of stock option. NSOs give you the option to exercise your options sometime involving the vesting date and the expiration date. (Call at your stock option plan document or maybe your employee benefits representative unless you know these dates.) When you exercise an NSO, the real difference between the stock’s fair market price and the exercise price will probably be taxable compensation that’s reported in your W-2. If you have vested options as well as the possibility to exercise them next year or 2013, you’ll have to determine in which year it may be more advantageous to exercise your options and recognize the wages. You may want to project your taxable income for 2012 along with a later year then decide at which time it might be less taxing to exercise your options and realize the extra income. You’ll should also consider the stock’s market outlook, its valuation as well as the options’ expiration date, inside your decision-making process.

 

ISOs are somewhat more complex since your holding period determines whether or not the exercise proceeds are taxed as everyday income (just like NSOs) or long-term capital gains. To learn from the potential long-term capital gains tax treatment (using its 15% top rate this year and 20% top rate in 2013) versus ordinary income tax rates (which range up to 35% this year and 39.6% in 2013), you must hold the stock you obtain several year from your exercise date and over 2 yrs from your grant date. Because of the holding period requirement, it’s obviously past too far to freeze the 15% capital gains tax rate on options you haven't yet exercised. However, if you exercised options this year or earlier yet still contain the shares, you’ll wish to weigh the advantages and disadvantages of advertising them and recognizing gains in 2012 versus retirement years.

 

It's also advisable to be aware that in the event you exercise and hold shares out of your ISO exercise, the taxable spread (the main difference between the stock price around the exercise date along with your option cost) will be taxable income for AMT purposes in the year in which the exercise occurs.

 

In the event you exercise your ISOs and sell without meeting this holding period, you will recognize taxable W-2 compensation similar to NSOs. Due to the lower capital gains rates, some think it's more attractive to hold ISO shares instead of selling them soon after your exercise. Just make sure to consider any ATM tax potential.

 

If, instead, you determine to exercise ISOs and then sell the stock, you may want to consider selling by year-end to consider good thing about 2012’s lower ordinary income tax rates. Just like NSOs, you’ll wish to industry outlook for that stock, in your decision-making process.

 CPA Boca Raton

Anthony Caruso, CPA has practiced like a certified public accountant and investment advisor for over 3 decades. Caruso and Company, P.A. can be a Registered Investment Advisor offering fee based money management, tax and financial planning. Information contained above is not intended as a suggestion to get or sell any sort of investments, or take specific tax actions and individuals should consult with their advisors for appropriate advice relating to their individual circumstances.

Share on Facebook Share on Twitter

Comments

No comments yet. Why not make the first one!

New Comment

[Sign In]
Name:

Comment:
(You can use BBCode)

Security:
Enable Images