Year End Fiscal Cliff Tax Strategies
Boca Raton CPA
According to what, if any, tax legislation Congress is able to enact in the next several weeks, we are going to likely notice a tax increase for 2013 and then years. Nevertheless, the following are some key strategies that ought to be considered.
Business Expense Strategies
An advanced cash-basis taxpayer and business owner operating as an S corporation, partnership or sole-proprietorship, you spend tax around the business’s net income on your own individual federal tax return. The business itself will not spend the money for tax. Therefore, a boost in tax rates will affect you. Now it is time to plot for these tax rate hikes. Specifically, pay close attention to once you incur deductible business expenses. You may postpone many of these expenses to some future year when tax rates might be higher. On the other hand, businesses with carry-forward losses will benefit more by accelerating income (for the extent possible based 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 to make state and local tax payments. Such payments include tax, property and personal property taxes. All of these items may be deductible for you depending on your tax situation. Research your situation to determine whether you've got flexibility to delay these payments into next year. 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
When you consider additional 2012 charitable contributions, you need to project forward to 2013. It might be advantageous to separate your charitable giving budget between the two years. A charitable deduction (so long as it's not subject to limitation based on your earnings) could potentially be a little more useful for 2013 in comparison to 2012. After some analysis, some think it's more advantageous to lower your remaining 2012 charitable contributions and allocate more assets (cash or securities) in your 2013 charitable budget. If you determine to wait for 2013 to create charitable gifts, you should think about making them with appreciated long-term assets instead of cash. Because of the prospect of rising tax rates, this strategy deserves a second look. Once the strategy is appropriate, the advantages are twofold:
When gifting appreciated stock to charity you avoid incurring capital gains taxes on the stock
A gift to a qualified charity supplies a tax deduction, for the extent it is not limited depending on your revenue.
Be sure to discuss this choice to insure expenditures are fully deductible.
With respect to payments out of your employer, consider whether you expect getting a bonus or perhaps a one time as a result of retirement or perhaps a job transition, and talk with your employer about your flexibility within the timing of receiving the payment. Some employees are offered transition payment schedules that stretch over multiple year. It isn't really ideal when tax rates are expected to improve as with 2013. Overview of the payment amount, date(s) of receipt along with your expected tax bracket in 2012 and long term will be important in deciding or negotiating when you receive this income.
Regarding IRA or annuity distributions, taxable distributions from IRAs or annuities certainly 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 component that into future-tax-year projections. Taking mandatory distributions boosts your taxable income and may even require either a boost in your withholding or, perhaps, paying estimated taxes quarterly in order to avoid an underpayment penalty. If you’re considering taking an elective distribution in the next couple of years, taking that distribution in 2012 when income tax rates are lower is a great idea. This strategy is specially timely when it comes to potential distributions and recognition of taxable income as a result of a Roth IRA conversion.
IRA to some Roth IRA Conversion Strategies
Anyone, no matter income, now can convert a conventional IRA to a Roth IRA. The great things about converting would be the potential for tax-free income in retirement and the capacity to give assets your heirs can withdraw tax-free after your death. However, you may incur income taxes in the year you are making the conversion. Because rates are scheduled to boost on January 1, 2013, if you’re considering converting, you might be better off carrying it out this season rather than in 2013.
Accelerating Long-Term Capital Gains Strategies
January 1, 2013, may see no more historically low long-term capital gains rates. Just how much these rates increase depends upon your ordinary taxes rate bracket. Various Congressional proposals have been made that included alternative schedules, with some affecting only higher-bracket taxpayers; however, at this stage they continue to be that - proposals. Since 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 tactic might be particularly appropriate in a few instances: It is possible to use 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) next year, you will be in the 10% or 15% ordinary taxes bracket, and that means you might be able to realize some tax-free long-term capital gains. In case your capital gains push you over your threshold, or else you will be in a higher income tax bracket, then some or every one of the gains will probably be taxed on the 15% long-term capital gains rate.
If you hold a concentrated equity position, meaning an amazing position in a stock that has appreciated as time passes, selling a percentage from the shares and purchasing other investments with the proceeds will help you diversify minimizing the marketplace risk inside your portfolio. If you have other goals which entail recognizing the gain, then you should assess the various ways of help manage the potential risk of a concentrated position as well as the tax liability that could occur upon selling an investment. However, given the limited strategic window for 2012’s historically low long-term capital gains tax rates, you might want to seriously consider selling a percentage this coming year. This can assist you avoid 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 one to consider how you are managing those assets. In some cases, the buyer and seller of such assets can structure the sale so that proceeds are paid over several tax year. Typically, this strategy helps the owner manage their tax liability. However, considering that both ordinary income tax rates and long-term capital gains tax rates are scheduled to increase in 2013, you might like to attempt to finish a sale, and receive its proceeds, this year. If that's not possible, then perhaps electing away from an installment sale treatment and accelerating the income recognition all to 2012 might be an alternative.
Think ahead before selling if you choose to sell appreciated securities next year to take good thing about the low long-term capital gains rates, but be strategic in the method that you take action. For the portion of your portfolio you've designated for long-term goals, review and rebalance your allocation so you have been in a better investment management position moving forward. Doing same goes with enable you to take advantage of 2012’s lower long-term capital gains tax rates, plus future years you may need less rebalancing, which should lessen increases in size that you realize once the tax rates are higher.
Accelerating Capital Losses Strategies
Typically, investors consider selling investments near year-end to realize losses to offset capital gains or as much as $3,000 in ordinary income. However, for those who have modest unrealized losses in 2012, and do not anticipate generating sizable capital gains, you might consider waiting to realize 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 ignore long-term capital gains distributions from mutual funds). For investors whose income (including long-term capital gains) is within the 10% or 15% taxes bracket, harvesting losses won't provide a tax benefit if it only reduces long-term capital gains. Losses in excess of gains will give you a nominal tax savings at best and may provide more value if left for future years.
If, alternatively, you've got substantial capital losses or capital loss carry-forwards, it may be challenging to burn up all of those losses. In this example, it probably doesn't make sense to postpone offsetting capital gains or waiting to acknowledge gains.
Rebalancing Your Portfolio Strategies
In general, a qualified dividend is a paid with a U.S. corporation or an international corporation that trades on the U.S. stock exchange. It's also possible to receive a qualified dividend if you hold shares in a mutual fund that invests over these types of corporations.
Currently, qualified dividends are taxed at a maximum 15% rate - like long-term capital gains; however, in 2013, they're scheduled to be taxed at ordinary income-tax-rates, which could be a maximum 39.6% rate (and quite possibly yet another 3.8% Obamacare surtax on high income taxpayers). Given this anticipated change, you might like to consider reallocating the portion your portfolio held in taxable accounts using the following strategies.
Consider adding growth-stock holdings. If you don’t need current income, you might want to look at the advantages of shifting a few of your equity allocation to growth stocks. Or you will reposition some of the tax-deferred account allocation to dividend-paying stocks, where the dividends is going to be shielded from current taxation. With a dividend-paying stock, your overall return is based on both growth and income, as well as the income portion may be taxed as ordinary income beginning in 2013.
In the event you hold a growth stock for a long time, any appreciation in the stock’s price won't be taxed until you sell it off. At that point, you'll owe long-term capital gains taxes (so long as you held the stock multiple year), that will nevertheless be below ordinary income rates even after 2012. Because this strategy involves issues surrounding both your long-term asset allocation and taxation, current debts should be completed to help determine the proper technique for your position.
Reassess your tax-exempt bond holdings. If you'd like income, carefully weigh the advantages and disadvantages of tax-exempt bonds versus dividend-paying stocks. With rising tax rates, tax-exempt income could be more appealing. Dividend-paying stocks run the risk of 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 is probably not too equipped to guard against inflation as stocks. Furthermore, 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 rates of interest increase, your bond investments’ principal value will fall. We recommend continual portfolio monitoring and the outlook for that economy and the markets, so any proactive changes can be made at the appropriate interval.
You’ll also want to evaluate the investment’s yield. At 2012 income-tax-rates, a tax-exempt bond using a 4% yield will be much like a taxable investment having a 5.3% yield for somebody in the 25% federal income tax bracket. If income-tax-rates increase, this same taxpayer will have to locate a taxable investment using a 5.6% yield to generate exactly the same after-tax income as the 4% tax-exempt bond.
If you decide to change your portfolio’s investment mix, keep in mind that overall asset allocation remains appropriate 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 be susceptible to a new (Obamacare) Medicare tax. If you’re in either group, one more 3.8% tax is going to be placed on some or your entire investment income, including capital gains. This will be as well as ordinary and capital gains taxes which you already pay!
Exercise Employer-Granted Commodity
If the company has granted you commodity as part of your compensation package, you might have either (or both) nonqualified commodity (NSOs) or incentive stock options (ISOs). You'll want to comprehend the choices you have and also the tax consequences of exercising each type of stock option. NSOs supply you with the choice to exercise your options sometime involving the vesting date and the expiration date. (See your stock option plan document or perhaps your employee benefits representative if you do not know these dates.) Whenever you exercise an NSO, the difference between your stock’s fair rate and the exercise price will be taxable compensation that’s reported on your W-2. If you have vested options and also the opportunity to exercise them this year or 2013, you’ll have to determine in which year it may be more beneficial to exercise the 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 alternatives and realize the extra income. You’ll should also consider the stock’s market outlook, its valuation as well as the options’ expiration date, within your decision-making process.
ISOs are a little bit more complex as your holding period determines whether the exercise proceeds are taxed as standard income (much like NSOs) or long-term capital gains. To profit from the potential long-term capital gains tax treatment (having its 15% top rate this year and 20% top rate in 2013) versus ordinary income tax rates (which range up to 35% next year and 39.6% in 2013), you need to contain the stock you receive multiple year from your exercise date and most two years from your grant date. Because from the holding period requirement, it’s obviously past too far to secure the 15% capital gains tax rate on options you have not yet exercised. However, should you exercised options in 2011 or earlier and still hold the shares, you’ll wish to weigh the pros and cons of promoting them and recognizing gains next year versus old age.
It's also advisable to know that if you exercise and hold shares out of your ISO exercise, the taxable spread (the difference between your stock price on the exercise date and your option cost) will be taxable income for AMT purposes around when the exercise occurs.
Should you exercise your ISOs 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 desirable to keep ISO shares as opposed to 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 take 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 upwards of 3 decades. Caruso and Company, P.A. is a Registered Investment Advisor offering fee based money management, tax and financial planning. Information contained above just isn't supposed to have been a recommendation to get or sell any specific investments, or take specific tax actions and people should talk to their advisors for appropriate advice relating to their individual circumstances.