Year End Fiscal Cliff Tax Strategies
Boca Raton CPA
According to what, if any, tax legislation Congress is able to enact in the next weeks, we are going to likely notice a tax increase for 2013 and later on years. Having said that, listed below are some key strategies that should be considered.
Business Expense Strategies
An advanced cash-basis taxpayer and company owner operating being an S corporation, partnership or sole-proprietorship, you have to pay tax around the business’s net gain in your individual federal tax return. The business enterprise itself will not pay the tax. Therefore, an increase in tax rates will probably affect you. Now it's time to plan for these tax rate hikes. Specifically, pay close attention to once you incur deductible business expenses. You might postpone many of these expenses to some future year when tax rates could be higher. On another hand, businesses with carry-forward losses will benefit more by accelerating income (towards the extent possible according to tax law) into 2012 and deferring expenses to 2013 or later.
Local and state Tax Payment Strategies
Taxpayers usually have some flexibility in determining when you should make local and state tax payments. Such payments include tax, real-estate and personal property taxes. Many of these items might be deductible for you depending on your tax situation. Take a look at situation to determine whether you have flexibility to obstruct these payments into next season. The delayed payment, and subsequent rise in tax deductions, may provide greater tax savings the coming year if tax rates increase.
Timing Charitable Contributions Strategies
As you consider additional 2012 charitable contributions, you ought to project to 2013. It may be advantageous to split your charitable giving budget between the a couple of years. A charitable deduction (as long as it's not at the mercy of limitation depending on your revenue) may potentially become more attractive 2013 than in 2012. If you do analysis, you may find it more beneficial to tear down remaining 2012 charitable contributions and allocate more assets (cash or securities) for your 2013 charitable budget. If you determine to watch for 2013 to make charitable gifts, you should think about making them with appreciated long-term assets as opposed to cash. Due to the potential for rising tax rates, this plan deserves a second look. If the method is appropriate, the benefits are twofold:
When gifting appreciated stock to charity you avoid incurring capital gains taxes about the stock
A present to some qualified charity supplies a tax break, towards the extent it's not limited depending on your revenue.
Be sure to discuss this option to insure expenditures are fully deductible.
Timing Income
With regards to payments out of your employer, consider whether you anticipate receiving a bonus or even a one time payment as a result of retirement or even a job transition, and talk with your employer about your flexibility within the timing of receiving the payment. Some personnel are offered transition payment schedules that stretch over more than one year. It isn't really ideal when tax rates are required to improve as with 2013. Overview of the payment amount, date(s) of receipt and your expected tax bracket next year and long term will be important in deciding or negotiating when you receive this income.
With regards to IRA or annuity distributions, taxable distributions from IRAs or annuities certainly are a concern inside a rising-tax-rate environment. In case you are required to take minimum distributions from your retirement plan, IRA or inherited IRA, you’ll desire to component 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 over the following couple of years, by taking your distribution next year when income-tax-rates are lower may be beneficial. This strategy is especially timely when it comes to potential distributions and recognition of taxable income due to a Roth IRA conversion.
IRA to some Roth IRA Conversion Strategies
Anyone, no matter income, can now convert a regular IRA to some Roth IRA. The benefits of converting would be the potential for tax-free income in retirement and the capacity to spread assets that the heirs can withdraw tax-free after your death. However, you could incur income taxes around you are making the conversion. Because rates are scheduled to increase on January 1, 2013, if you’re considering converting, you could be more satisfied doing the work this season as opposed to in 2013.
Accelerating Long-Term Capital Gains Strategies
January 1, 2013, could see get rid of historically low long-term capital gains rates. How much these rates increase is dependent upon your ordinary tax rate bracket. Various Congressional proposals have been made that included alternative schedules, by incorporating affecting only higher-bracket taxpayers; however, at this stage they continue to be just that - proposals. Since it stands now, it may seem good to sell appreciated securities or assets that you’ve held for the long term in 2012 to consider benefit of this year’s lower capital gains tax rates. This strategy could be particularly appropriate in common situations: You can take advantage of the current 0% long-term capital gains rate. If the net taxable income, together with your long-term capital gains, is under $70,700 (joint filers) or $35,350 (single filers) in 2012, you will end up within the 10% or 15% ordinary taxes bracket, and that means you could possibly realize some tax-free long-term capital gains. In case your capital gains push you over your threshold, or you are in a greater tax bracket, then some or every one of the gains will be taxed on the 15% long-term capital gains rate.
Should you hold a concentrated equity position, meaning a considerable position in a single stock which has appreciated as time passes, selling a portion of the shares and getting other investments using the proceeds can assist you diversify minimizing the market risk in your portfolio. For those who have other goals which involve recognizing the gain, then you need to assess the various ways of help manage the potential risk of a concentrated position as well as the tax liability that may occur upon selling a purchase. However, given the limited window of opportunity for 2012’s historically low long-term capital gains tax rates, you may want to you should think about selling a percentage this year. Doing so will help you steer clear of the potential tax rate increase that's scheduled for long-term capital gains recognized in 2013 and thereafter.
Should you own property or business assets, the upcoming tax rate changes should prompt you to definitely consider the way you are managing those assets. In some cases, the purchaser and seller for these assets can structure the sale to ensure that proceeds are paid over more than one tax year. Typically, this plan helps the owner manage his or her 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 want to make an effort to complete a sale, and receive its proceeds, next year. If that is difficult, remodel which will electing away from an installment sale treatment and accelerating the income recognition all to 2012 might be an option.
Think ahead before selling if you decide to sell appreciated securities this year to consider benefit of the reduced long-term capital gains rates, but be strategic in the method that you do it. For the portion of your portfolio you've got designated for long-term goals, review and rebalance your allocation so you are in an improved investment management position going forward. Doing so will enable you to benefit from 2012’s lower long-term capital gains tax rates, plus long term you may need less rebalancing, which should help reduce increases in size that you simply realize when 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 up to $3,000 in ordinary income. However, when you have modest unrealized losses in 2012, , nor anticipate generating sizable capital gains, you might consider waiting to understand those losses until 2013.
Offsetting long-term capital gains that are taxed at 20% (the 2013 rate) will give you more tax savings than with all the losses to offset gains taxed at 15% (the 2012 rate). You’ll will want 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% income tax bracket, harvesting losses is not going to give a tax benefit when it only reduces long-term capital gains. Losses over gains will offer you a nominal tax savings at best and could provide more quality if left for future years.
If, however, you have substantial capital losses or capital loss carry-forwards, it could often be challenging to use up all of those losses. In this case, it in all probability does not seem sensible to postpone offsetting capital gains or waiting to acknowledge gains.
Rebalancing Your Portfolio Strategies
Generally, a professional dividend is one paid by way of a U.S. corporation or an international corporation that trades over a U.S. stock market. You may also get a qualified dividend if you hold shares in the mutual fund that invests during these forms of corporations.
Currently, qualified dividends are taxed in a maximum 15% rate - like long-term capital gains; however, in 2013, they may be scheduled to be taxed at ordinary income tax rates, which may be a maximum 39.6% rate (and oftentimes one more 3.8% Obamacare surtax on high income taxpayers). Given this anticipated change, you may want to consider reallocating the portion your portfolio located in taxable accounts while using following strategies.
Consider adding growth-stock holdings. In the event you don’t need current income, you might like to look at the features of shifting some of your equity allocation to growth stocks. Or you will reposition some of your tax-deferred account allocation to dividend-paying stocks, where the dividends will probably be shielded from current taxation. Having a dividend-paying stock, your total return is dependant on both growth and income, and the income portion could be taxed as everyday income beginning in 2013.
If you hold an improvement stock in the future, any appreciation inside the stock’s price won't be taxed unless you sell it. At that point, you'd owe long-term capital gains taxes (if you held the stock more than one year), which will nevertheless be below ordinary income rates despite 2012. Because this strategy involves issues surrounding both your long-term asset allocation and taxation, careful analysis has to be done to help determine the best technique of your position.
Reassess your tax-exempt bond holdings. If you need income, carefully weigh the pros and cons of tax-exempt bonds versus dividend-paying stocks. With rising tax rates, tax-exempt income may be more appealing. Dividend-paying stocks risk having their dividend reduced or eliminated altogether. Also, tax-exempt bonds are usually less volatile than stocks.
However, tax-exempt investments have inherent risks. For instance, bond investments might not be as well equipped to safeguard against inflation as stocks. Additionally, take into account that some municipal bond interest may trigger the AMT tax. Also, bond prices will fluctuate and move inversely to interest levels. If interest rates increase, your bond investments’ principal value will fall. We recommend continual portfolio monitoring and the outlook for that economy as well as the markets, so any proactive changes can be created when necessary.
You’ll should also assess the investment’s yield. At 2012 income-tax-rates, a tax-exempt bond having a 4% yield could be much like a taxable investment using a 5.3% yield for an individual inside the 25% federal taxes bracket. If income tax rates increase, this same taxpayer will have to locate a taxable investment using a 5.6% yield to generate the identical after-tax income since the 4% tax-exempt bond.
If you choose to alter your portfolio’s investment mix, understand that overall asset allocation remains suitable for ignore the goals, time horizon and risk tolerance.
Medicare Tax on Investment Income Strategies
Starting in 2013, married filing joint taxpayers with incomes over $250,000 and single taxpayers with incomes over $200,000 will probably be susceptible to a fresh (Obamacare) Medicare tax. If you’re in either group, an additional 3.8% tax will be placed on some or your entire investment income, including capital gains. This can be as well as ordinary and capital gains taxes that you already pay!
Exercise Employer-Granted Commodity
If the company grants you commodity as part of your compensation package, you may have either (or both) nonqualified stock options (NSOs) or incentive investment (ISOs). You'll want to comprehend the choices you've got and the tax consequences of exercising each kind of stock option. NSOs provide you with the choice to exercise the options sometime between the vesting date and the expiration date. (See your stock option plan document or your employee benefits representative if you do not know these dates.) When you exercise an NSO, the real difference involving the stock’s fair market value and also the exercise price will be taxable compensation that’s reported on your own W-2. When you have vested options and also the chance to exercise them in 2012 or 2013, you’ll need to determine by which year it could be more beneficial to workout the choices and recognize the wages. You might like to project your taxable income for 2012 and a later year after which decide after which it might be less taxing to exercise your choices and realize the additional income. You’ll want to think about the stock’s market outlook, its valuation and also the options’ expiration date, in your decision-making process.
ISOs are more complex because your holding period determines whether the exercise proceeds are taxed as ordinary income (similar to NSOs) or long-term capital gains. To learn in the potential long-term capital gains tax treatment (having its 15% top rate in 2012 and 20% top rate in 2013) versus ordinary income-tax-rates (which range as much as 35% in 2012 and 39.6% in 2013), you have to contain the stock you receive more than one year in the exercise date and more than a couple of years from the grant date. Because from the holding period requirement, it’s obviously past too far to freeze the 15% capital gains tax rate on options you have not yet exercised. However, should you exercised options in 2011 or earlier but still hold the shares, you’ll wish to weigh the pros and cons of selling them and recognizing gains this year versus old age.
It's also wise to remember that should you exercise and hold shares from your ISO exercise, the taxable spread (the main difference involving the stock price around the exercise date as well as your option cost) will probably be taxable income for AMT purposes in the year when the exercise occurs.
In the event you exercise your ISOs and then sell without meeting this holding period, you will recognize taxable W-2 compensation much like NSOs. Because of the lower capital gains rates, it may seem more appealing to hold ISO shares instead of selling them soon after your exercise. Just make sure you consider any ATM tax potential.
If, instead, you choose to exercise ISOs and then sell the stock, you might want to consider selling by year-end to adopt benefit of 2012’s lower ordinary income tax rates. As with NSOs, you’ll want to industry outlook for your stock, within your decision-making process.
Boca Raton CPA
Anthony Caruso, CPA has practiced as a cpa and investment advisor for over Thirty years. Caruso and Company, P.A. is a Registered Investment Advisor offering paid money management, tax and financial planning. Information contained above just isn't intended as a suggestion to purchase or sell some kind of investments, or take specific tax actions and people should check with their advisors for appropriate advice relating to their individual circumstances.