2012 Year-End Tax Planning Strategies
Caution: The preceding two strategies do not benefit taxpayers who are subject to the alternative minimum tax (AMT), since taxes are not deductible to the extent that a taxpayer is subject to the AMT. Taxpayers subject to the AMT may, instead, consider deferring deductible tax payments to the subsequent year.
Important: The AOC is only applicable to tax years 2009 through 2012. Without Congressional action, 2012 is the final year for this more lucrative education credit. Qualifying tuition and fees that you pay in 2012 for an academic period beginning in January, February, or March of 2013 are eligible to be used in figuring the credit claimed on your 2012 return. Therefore, if payments made in 2012 that apply to 2012 academic periods haven’t maxed out your credit, you should consider making the payments covering academic periods starting in the first 3 months of 2013 before the end of 2012.
Prepay Medical Expenses – Beginning in 2013 for taxpayers under the age of 65, the AGI threshold percentage for claiming medical expenses on a taxpayer’s Schedule A will increase from 7.5% to 10%, which is the same as the current threshold percentage for alternative minimum tax (AMT) purposes. Individuals (and their spouses) age 65 (before the close of the year) and older will continue to use the 7.5% rate through 2016. Thus, it may be appropriate to pay outstanding medical bills or pre-pay such things as orthodontics for a child before the AGI threshold increases to 10%. In addition, if you are considering elective deductible medical procedures, such as laser eye surgery, it may be beneficial to have the procedure and pay for it in 2012.
Prepare For New 2013 Health Care Taxes – Beginning in 2013, higher income taxpayers will be subject to the following two new taxes included in the Affordable Care Act:√ Increased Hospital Insurance Tax – The Hospital Insurance (HI) tax rate (currently at 1.45% for employees and 2.9% for self-employed individuals) will increase by 0.9 percentage points on individual taxpayer earnings (wages and self-employment income) in excess of compensation thresholds for the taxpayer’s filing status. Thus, the wage withholding HI rate will be 1.45% up to the income threshold and 2.35% (1.45 + 0.9) on amounts in excess of the income thresholds. The hospital insurance portion of the SE tax rate will be 2.9% up to the income threshold and 3.8% (2.9 + 0.9) on amounts in excess of the threshold. The income thresholds at which this increase begins is $250,000 for married taxpayers fling jointly, $125,000 for married taxpayers filing separately, and $200,000 for all other taxpayers.
For married taxpayers, this additional tax is based upon their joint income. However, if both spouses work, their employers will only base the withholding on the employee’s individual earnings. Thus, married taxpayers who both work may find themselves under-withheld on HI taxes and will thus be required to pay the uncollected HI tax on their income tax return when it is filed. They may need to take steps to increase income tax withholding or pay or increase estimated taxes in order to compensate.
If you are an employee whose compensation is nearing the threshold amount and you anticipate receiving a bonus early in 2013 that, when combined with your regular wages, will put you over the threshold, you may wish to see if your employer will pay the bonus to you in 2012. However, this strategy requires that the effects of the extra income on your 2012 taxes be analyzed in order to determine whether or not it is beneficial.
√ Surtax on Unearned Income – A new surtax called the Unearned Income Medicare Contribution Tax is imposed on the unearned income of individuals, estates, and trusts. For individuals, the surtax is 3.8% of the lesser of:1. The taxpayer’s net investment income or2. The excess of modified adjusted gross income over the threshold amount ($250,000 for a joint return or surviving spouse, $125,000 for a married individual filing a separate return, and $200,000 for all others).
“Net” investment income is investment income reduced by allowable investment expenses. Investment income includes income from interest, dividends, annuities, royalties, rents (other than those derived from a trade or business), capital gains (other than those derived from a trade or business), trade or business income that is a passive activity with respect to the taxpayer, and trade or business income with respect to the trading of financial instruments or commodities. For surtax purposes, modified adjusted gross income does not include excluded items, such as interest on tax-exempt bonds, veterans’ benefits, and excluded gains from the sale of a principal residence.
In order to avoid or minimize this new tax, higher income taxpayers may wish to alter their investment portfolios to include more of the non-taxable investments mentioned above.
Homeowners should be aware that the gain from the sale of their primary home in excess of the homeowner’s gain exclusion or the gain from selling a second residence is treated as investment income and would be subject to this new tax.
Talk to a professional
When it comes to year-end tax planning, there’s always a lot to think about. A financial professional can help you evaluate your situation, keep you apprised of any last-minute legislative changes, and determine if any year-end moves make sense for you.
Our 24/7 Customer Service support team will be more than glad look into your needs and provide you proper instructions on how to avail of our services. Here at Retirement Thru Design we are guiding you with safe, pure solutions designed to help you meet your financial goals, not ours.