Midyear Tax Planning: Tips for a Time of Uncertainty
With the Bush tax cuts set to expire soon, we are uncertainty times regarding future tax rates. There are, however, tax-saving steps that can be taken even with this uncertainty.
Here are a few ideas that taxpayers might want to avail themselves of this summer.
1. Accelerating Income to 2012 A common strategy is to defer income when possible to a later year. For example, a business might do this by sending out invoices later in the year than normal.
This approach is fine if you expect to have the same or lower tax rate next year, but with the tax cuts scheduled to expire, many may find they have higher rates in 2013.
If so, then it may be better to move income into this year so that it can be taxed at today's lower rate.
2. Take Advantage of Historically Low Rates on Investment Income The tax rate on qualified dividends and long-term capital gains is currently 0% for some taxpayers with a maximum rate of 15% for all. These rates could be gone at the end of the year, so now may be time to take advantage of them.
If your income is too high to qualify for the 0% rate (available to married couples making less than $70,700 or single filers making less than $35,350), then consider giving some appreciated stock or mutual fund shares to loved ones who fall within the lower brackets.
Remember though, giving securities to anyone under age 24 could result in them being taxed at their parents' rates.
Also consider harvesting gains on investments this year while the maximum rates are so low. The favorable rates apply to investments held for over a year.
Selling some investments in which you have a loss before year end can also be a good move. The resulting capital losses will offset gains from other sales.
3. Leverage Standard Deductions by Bunching Deductions If your 2012 itemized deductions are likely to be just under, or just over, the standard deduction amount, consider bunching them together every other year.
For example, you could prepay anticipated 2013 state taxes by December 31 of this year and claim both the 2012 and 2013 payments on your 2012 return.
However, be aware of the potential that you'll pay a higher tax rate next year. If you think you might, consider claiming the standard deduction this year and bunch your itemized deductions into 2013 where they can offset the higher taxed income.
4. For Businesses, Save on New and Used Equipment and Software Section 179 of the tax code allows eligible businesses to claim up-front depreciation write-offs for new and used equipment and software. The maximum deduction is currently $139,000, but it is set to drop to $25,000 in 2013.
5. For Businesses, Take Advantage of 50% Bonus Depreciation Above and beyond the Section 179 deduction, your business can also claim first-year bonus depreciation equal to 50% of the cost of most new equipment and software placed in service this year. This break will expire at year-end unless Congress extends it.
6. Don't Overlook Estate Planning The federal gift and estate tax exemption for 2012 is a historically liberal $5.12 million, but it is scheduled to drop to only $1 million in 2013. The maximum estate tax rate is also expected to rise starting next year from 35% to 55%.
Given the current exemptions and rates, you may want to re-evaluate your financial plan when it comes to estate and gift planning so that you're taking advantage of these breaks where possible.
7. If Charitably Inclined, Sell Loser Shares and Give Away Cash If you're thinking of giving away loss securities as gifts, you're better off selling them and giving away the cash so you can deduct the loss. It could, however, be best to give away appreciated securities, since recipients will likely have lower tax rates than you would if you sold them.
The same rules apply when it comes to giving to charity. You will save by selling loss shares and claiming the capital loss on your tax return, and then giving the cash proceeds to charity and claiming a charitable deduction.
8. Convert Traditional IRAs into Roth IRAs If your traditional IRA still hasn't recovered from the market decline of a few years back, then the bad news is it's likely worth less than it once was. On a positive note, the tax hit from converting it to a Roth IRA right now will also be less.
A tax bill now may be a small price to pay for tax savings since future gains in a Roth IRA will be tax-free, unlike traditional IRAs which could be hit with higher tax rates.
9. Pay Attention to the Alternative Minimum Tax While many recent tax law changes have been helpful in reducing your regular taxes, they didn't do much to reduce the odds that you'll owe the dreaded Alternative Minimum Tax. Therefore, it's critical that you evaluate all tax planning strategies in light of the AMT rules before making any moves.
