Wednesday, December 26, 2012

Tax Planning year end tips

Well, Christmas has passed, and that means that the next big thing coming is…. the final throes of the 2012 tax planning period. Never mind parties, football, and the Rose parade. Who can think of anything else while there is still time to do a few things that will lower your income taxes for 2012? But time is running out. If you don’t act now you may be writing larger checks come April 15!

Here are a few things to consider:

1.       Donations to charity this week will impact your taxes in April if you itemize deductions. Time to clean out the closets and make a Goodwill run. Keep a detailed list of what you donate and get a receipt. If you leave stuff at a drop box document what you left and the date and time.

2.       Make sure your final paycheck maxes out your contribution into elective retirement plans such as your 401k or Simple Ira plans.

3.       If you drive a car for business and are taking business deductions, take it in for service this week. Not only will you incur a deductible expense, but the service ticket will document the odometer reading by a third party.

4.       Consider selling losing investments now. The trades must settle by 12/31 so you have to act fast if you want this to impact your 2012 taxes.

5.       You may want to prepay some of your state taxes by 12/31. If you are not subject to AMT and you will owe the state in April it may be a wise move to write the check by Dec 31 and get a federal deduction for the payment.

You should consult with your tax advisor before doing anything. Depending on your situation these tactics may not have the desired effect, and there may be other things that you can do as well.

Regardless of what you decide to do, I wish all of you a safe and Happy New Year.


Wednesday, December 12, 2012

Tax Planning Sea Change

Each year, just in time to take the fun away from the Holidays, we reach out to our clients and attempt to project tax liabilities and recommend strategies to reduce their tax burden. It’s particularly important to think about this now, before year end, while you still have time to make changes to your tax profile. It’s an unfortunate situation when we have clients who ask us on April 15th what they can do to reduce the tax they owe. In most cases the horse is already out of the barn by then and there are few tactics we can employ to change the outcome.
In the past, one typical tactic was to defer income and accelerate expenses. In a case of static or decreasing tax rates, over time this can be an effective way to lower your overall burden and keep your money working for you longer.  But things are different now.
With the reelection of President Obama there is no chance of Obamacare being repealed in the near future. Consequently, despite all the talk about the fiscal cliff negotiations and everything being “on the table”, one thing for certain is that the new taxes ushered in as part of the Affordable Care Act will not be repealed. At a minimum we are looking at unearned income in 2013 being taxed at a rate 3.8% higher than your statutory rate, whatever that may be. Note: There are earnings thresholds that trigger this tax at $200k for singles, $250k for joint filers. If you are below that it won’t affect you.
Further, we are listening to calls to tax the rich and leave the middle class alone, but the definitions of middle class and rich seem to vary depending on the politician.  Bottom line – whether the current “Bush” tax rates are extended fully, partially, or not at all, tax rates are not declining. Some are clearly increasing, and most likely a good percentage of filers will see marginal rates increase next year.
As a result, this is the first time in years that the general rule of deferral is the opposite of what we are telling many clients to do.  If you know that your income will cost you more in tax next year, and that your deductions will save you more in taxes then, the drill should be to accelerate your income now (get your billings invoiced, deposit all your checks) and /or to put off paying tax deductible bills until January. Its crazy, but paying tax now may save you money next year.

Self-serving Caveat: Each situation is different. If you have any questions about what you should do you really should consult with a tax professional.