This year, year-end planning poses a bigger challenge than ever before. The fate of many tax incentives taxpayers have grown accustomed to over recent years will likely be unknown until Congress and the Administration come to a decision next month. With the prospect of higher taxes in 2013, individuals need to make an effort to engage in year-end planning. Presti & Naegele has compiled tips for traditional year-end planning considerations that should not be overlooked.
“The uncertainty of this year’s legislation plays a major role in 2012 year-end tax planning for many taxpayers,” said Andrew Presti, Partner of Presti & Naegele. “However, there are steps individuals can take before the end of the year to improve their bottom line.”
- Changes in filing status: Marriage, divorce, death of a spouse, or a change in head-of-household status during 2012 (or anticipated for 2013) will impact your tax bracket and bottom line tax liability. Anticipate the additional expense or lower tax bill that a change in filing status may bring.
- Changes in family status: Birth of a child, adoption, combined families through re-marriage, and even the ages of children in 2012 and 2013 can matter to year-end tax planning. Dependency exemptions in some instances depend upon the amount of support provided within the tax year. The ability to take advantage of the child tax credit, the child-care credit, the earned income credit, application of the kiddie tax, and the ability to be covered under a parent’s health insurance under the new health care law in part hinges upon how a “child” is defined within certain age limits.
- Changes in employment: Retirement and semi-retirement is also a major event for tax purposes for which first-year “required minimum distributions” from retirement savings must be calculated and made. An important year-end consideration is facing an entirely new matrix of investment income considerations focused on “smoothing” the amount of income and deductions among several years to achieve maximum tax results.
- Timing the recognition of capital gains and losses is important to maximize offsetting short-term gains with short-term losses. Especially relevant to 2012 year-end timing of capital gains and losses is the introduction of a 3.8 percent Medicare contributions tax that will be assessed on excess net investment income starting in 2013.
- Projecting available itemized deductions for 2012: Determine whether a better tax result might take place by deferring or accelerating some of those deductions. Some taxpayers who are close to the amount of their standard deduction amount may want to load deductions into a single year, say 2013, so they have enough to itemize deductions for that year, while still being entitled to the maximum amount of their standard deduction into an adjacent year (2012 in our example). Other taxpayers need to be aware of alternative minimum tax (AMT) exposure in which many deductions become cut back or eliminated.
- Pay attention to unusual expenses that may generate an atypical deduction or credit, such as emergency medical expenses, moving expenses, or unemployment and job-search expenses: In connection with medical expenses, and particularly relevant to 2012 year-end planning, is the increase in the floor on deductible medical expenses from 7.5 percent adjusted gross income (AGI) in 2012 to 10 percent AGI in 2013 (7.5 percent for those who reach 65 years of age by the close of the tax year).
- Gift giving, both charitable and for estate planning purposes, is important at the end of the year: In addition to better knowing what assets remain available for gifting (or what income needs offsetting with a charitable deduction), certain tax benefits cannot be accumulated but must be used or lost each year. For example, the $13,000 annual gift tax exclusion per recipient cannot be carried over and used in addition to the $14,000 gift tax exclusion that will be available in 2013. A gift of $13,000 on December 31, 2012 and a $14,000 gift on January 1, 2013, for example, amount to a $27,000 tax-free gift; while a $27,000 gift all on January 1, 2013 will subject $13,000 of that gift to potential gift tax. A charitable gift can frequently require the same timing finesse, for example, if donors find themselves in a higher tax bracket in a particular year or not being able to otherwise itemize deductions.
Once Congress acts on year-end tax legislation this year, Presti & Naegle also suggests that most taxpayers consider what steps need to be taken before the 2012 tax year closes to mitigate against any unfavorable new tax provisions.
For more information on how traditional year-end planning can benefit your bottom line, please contact Presti & Naegele at 212-736-0055 or visit www.prestinaegele.com.
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