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2012 Year End Planning

Despite the best move this year is to avoid thinking it's possible to know exactly what will happen. Instead, taxpayers should focus on what is known, maximize breaks while they still exist, reduce vulnerability to unknowns without acting rashly and, above all, stay flexible.  In most years, taxpayers adopt a strategy of deferring income, but with the Bush-era tax cuts set to expire on December 31, 2012, income tax rates and capital gains taxes set to rise, and a 0.9 percent Hospital Insurance (HI) tax applicable to earnings of self-employed individuals or employee wages in excess of $200,000 ($250,000 if filing jointly) effective January 1, 2013, it might make more sense to accelerate income into 2012 instead of deferring it to 2013.

Everyone has unique situations, so you should sit down with your advisor to discuss your specific options.  Some things you should discuss at this meeting are:

Accelerating Income

·         Taking gains on appreciated investments if it makes sense.  If the investment no long fits into your portfolio going forward or you will have anticipated liquidity needs and you may be selling the investment sometime next year, it may make sense to take the gain this year.

·         If possible take a bonus this year.  Contractual bonuses are not flexible and will have to be taken in 2013.

·         If you were granted stock options.  You may want to exercise them this year.  This is a tricky subject that required a professional CPA to give you exact advice depending on the type of options granted.  Be sure to bring this question up to your CPA to be sure your timing is correct and you are aware of all tax implications.

·         If you are self employed, be sure to get you invoices /bills out ASAP to get paid before December 31 2012.

Accelerating Deductions

·         Pay a state estimated tax installment in December instead of at the January due date. However, make sure the payment is based on a reasonable estimate of your state tax.

·         Pay your entire property tax bill, including installments due in year 2013, by year-end. This does not apply to mortgage escrow accounts.

·         Now is the time to bunch deductible medical expenses. Medical expense deductions are 7.5% of AGI this year, but in 2013 increase to 10% of AGI.  So instead of an installment plan, if possible pay it all this year if it will get you over the 7.5% of AGI.


Tuition payments

·         The American Opportunity Tax Credit, which offsets higher education expenses, is set to expire after 2012. It may be beneficial to pay 2013 tuition in 2012 to take full advantage of this tax credit, up to $2,500, before it expires.

Make Charitable Contributions

·         The best value often comes from donating appreciated assets, because donors can get a full deduction while skipping capital-gains tax on the asset's growth. Cash donations to charities are often deductible up to 50% of adjusted gross income, while the limit for gifts of other assets is often 30%. Disallowed portions usually carry over to future years.

·         If you are concerned that the charitable deduction could shrink next year? If so, make a large donation to a "donor-advised" fund and qualify for a full write-off this year. Assets can then grow tax-free in the fund until donors specify tax-free recipients, sometimes years later. There's no deduction at that point.

·         A written record of charitable contribution is required in order to qualify for a deduction. A donor may not claim a deduction for any contribution of cash, a check or other monetary gift unless the donor maintains a record of the contribution in the form of either a bank record (such as a cancelled check) or written communication from the charity (such as a receipt or a letter) showing the name of the charity, the date of the contribution, and the amount of the contribution.

·         Contributions of appreciated property (i.e. stock) provide an additional benefit because you avoid paying capital gains on any profit

Maximize contributions to employer-sponsored retirement plans.

·         Unlike with IRAs, the deadline for 401(k) contributions is Dec. 31. This year, the employee limit is $17,000 or $22,500 for workers 50 or older. This pretax contribution has two benefits: It bolsters savings and reduces adjusted gross income that might qualify the taxpayer for benefits that phase out at higher incomes.

Investment Gains And Losses

·         Minimize taxes on investments by judicious matching of gains and losses. Where appropriate, try to avoid short-term gains, which are usually taxed at a much higher tax rate (up to 35% in 2012, but scheduled to rise to 39.6% in 2013) than long-term gains.

·         Consider where feasible to reduce all capital gains and generate short-term capital losses up to $3,000 as well.

·         Think twice before harvesting gains. Yes, the capital-gains tax will be higher next year. Accelerating a sale into this year can make sense for investors who were planning to divest within the next two years—either because a holding no longer fits a portfolio or cash will be needed, say for tuition.

Year-End Giving To Reduce Your Potential Estate Tax

·         For many, sound estate planning begins with lifetime gifts to family members. In other words, gifts that reduce the donor's assets subject to future estate tax. Such gifts are often made at year-end, during the holiday season, in ways that qualify for exemption from federal gift tax.

·         Gifts to a donee are exempt from the gift tax for amounts up to $13,000 a year per donee.

Use up funds in a medical flexible-spending account.

·         They often don't carry over, although some employers will allow workers to spend 2012 funds in the first weeks of 2013. Next year, the contribution limit will be $2,500, less than some employers now allow.


·         These are just a few of the steps you might take. Please contact me for help in implementing these or other year-end planning strategies that might be suitable to your particular situation.

Disclaimer:  These are only meant to be suggestions.  This information is not intended to be and should not be treated as legal advice, investment advice or tax advice.  Readers including professionals should under no circumstances rely upon this information as a substitute for obtaining specific legal or tax advice from their own counsel.






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