TMTW #106 – Tax Planning for 2012

Tax and Money Tip of the Week
Tax Planning for 2012
August 22th, 2012 | No. 106

Two weeks ago we discussed upcoming 2013 tax increases due to the health care bill. This week here are some suggestions to consider for the remainder of 2012 while we know what the tax rules are.

The basic strategy for 2012 is to accelerate income while we are enjoying what may be the lowest tax rates we will see for the foreseeable future.  Specific strategies include:

– Accelerating income by asking for 2012 bonuses in lieu of 2013 pay increases.

– Exercising nonqualified stock options in 2012.

– Cash basis business owners should be aggressive in collecting on accounts receivables so income is taxed in 2012.

– Business owners should consider maximizing dividends in 2012 so they are taxed at the 15% rate.

– If you have unused investment interest expenses, consider planning that elects to treat qualified dividends and/or long-term capital gains as ordinary income in 2012.  You could then use the investment interest expense in 2012 and delay usage until 2013. (Note-this is a pretty complex tax tool and should only be considered with the help of a tax pro).

– Consider a traditional IRA conversion to a Roth IRA.  This way you can calculate the tax hit on today’s tax rate and reap the benefit of tax-free distributions in future years when tax rates may be higher.

– Start looking now at possible reallocations of investment portfolios to minimize the 3.8% Medicare tax on investment income in 2013.

– If reallocating your investment accounts makes sense, reap your long-term capital gains in 2012 so they are taxed at 15%.

– Self-employed individuals should look at establishing retirement accounts to minimize taxable income in 2012 and 2013.

– There are other charitable and gift giving strategies that should be considered in 2012 that go beyond the scope of this article.

– Some pundits are even advocating some couples get divorced in 2013!  This would be in situations when each spouse has income below the $200,000 threshold that avoids the additional 0.9% Medicare tax, but whose combined income would exceed the $250,000 threshold that makes couples subject to this tax.

Every individual has a unique set of circumstances and goals.  These tips are just a few strategies that may apply to you.  This year, more than ever, it is important to begin your year-end tax planning early.

We will keep you posted as the tax laws evolve over the next several months.

As always, give us a call if you would like to discuss your personal tax planning strategies.

Questions or Comments?

You can add comments on the blog, call 919-847-2981, or visit our web site. We look forward to hearing from you.

Mark Vitek, CPA/PFS, CFP®
…until next week.

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