Year-End Tax Considerations
#1 -TAX ARMAGEDDON AND THE FISCAL CLIFF ARE STILL LOOMING
• Bush tax cuts enacted in 2001 and 2003 are scheduled to expire at the end of 2012.
• These tax cuts were originally set to expire in 2010, but were extended for two years.
• Payroll tax reductions are slated to expire at the end of 2012.
• Bonus depreciation and Section 179 expensing for businesses is set to expire after 2012.
• Estate and gift tax exemptions are scheduled to decrease.
• Tax-related provisions of the Patient Protection and Affordable Care Act begin to take effect in 2013.
• A ten-year period of more than $1 trillion in spending cuts will begin in 2013 as a result of the "super committee" failure to reach an agreement.
#2 - POTENTIAL IMPACT OF EXPIRING TAX PROVISIONS
• Marginal individual tax rates increase from 10, 15, 25, 28, 33 and 35% to 15, 28, 31, 36 and 39.6%
• Capital gain tax rates increase from 15% to 20% and the zero percent capital gain tax rate is eliminated.
• Tax rates on dividends will increase from 15% to the individual's marginal income tax rate.
• Itemized deductions and personal exemptions will begin to be limited for certain individuals.
• Child tax credit will be reduced from $1,000 per child to $500 per child.
• A decreased standard deduction and altered tax tables would re-introduce the "marriage penalty."
• If the alternative minimum tax exemption is not patched, as many as 28 million taxpayers could be affected.
#3 - IMPACT OF HEALTH CARE ACT PROVISIONS BEGINNING IN 2013
• An additional 0.9% Medicare tax on wages and self-employment income will be paid by individuals with income in excess of $200,000 ($250,000 for married filers).
• An additional 3.8% Medicare tax on net investment income will be paid by individuals with income in excess of $200,000 ($250,000 for married filers). Examples of investment income include interest, dividends, annuities, royalties, rents and passive business activities.
• Flexible spending account contributions will be capped at $2,500 per year.
• The threshold for deducting medical expenses will increase from 7.5% to 10% of income. Individuals over age 65 will continue to use the lower threshold until 2017.
#4 - WILL CONGRESS ACT?
• December 21 is the last day Congress could vote on a bill before the holidays.
• If Congress does not reach a compromise, they would need to return to Washington for the last week of 2012.
• Though nobody has a crystal ball, it seems likely that differences will not be resolved until early January.
#5 - WHAT CAN I DO NOW?
• Consider accelerating income into 2012.
• Consider accelerating itemized deductions into 2012.
• Consider last minute gifting strategies if your estate is greater than $5 million.
• Roth IRA conversions may be prudent, especially if your 2012 income is relatively low.
• Meet with your financial advisor to discuss last-minute strategies.
Christopher J. Harper, CPA, MBA
Hungerford, Aldrin, Nichols & Carter, P.C.
2910 Lucerne Drive SE
Grand Rapids, MI 49546