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2012 Year-End Tax Planning Overview

Every November, as part of my continuing professional education requirement, I attend an all-day tax seminar, where tax law changes and recent court decisions are explained and discussed.

Normally, this conference is about as exciting as a root canal, but this year, because of all the uncertainties surrounding the impending “fiscal cliff,” the mood was more like a convention of psychics discussing the impending Mayan apocalypse.

For the CURRENT 2012 tax year, the changes from 2011 are relatively minor, and shouldn’t affect most of you, with the singular exception of California Proposition 30 which RETROACTIVELY increased the highest marginal tax rates for individuals with taxable incomes in excess of $250,000 and couples with incomes in excess of $500,000 from one to three percent. Because this change was retroactive to the beginning of the year, you may have been under-withheld on your California income taxes (or paid in less than the required quarterly estimates). If you think you may be subject to this increase, contact me before the end of the year so that the shortfall can be calculated.

As far as the situation for 2013 and beyond is concerned, your guess is as good as mine. As of this writing, Congress has yet to act on proposals to prevent a “worst-case” scenario, but presumably some action will be taken before December 31. Nonetheless, the consensus view is that in all likelihood, EFFECTIVE tax rates will increase for MOST taxpayers, either from an increase in marginal tax rates, or the reduction or the elimination of certain credits, deductions and benefits.

For that reason, the normal tax planning strategy of deferring income until next year and accelerating deductions to the current tax year should probably be reversed.

For example, if you are sitting on investments with sizable gains, it might be a good idea to sell them before year end and take the gains in 2012. If these investments are still sound, you can repurchase the same shares and effectively “lock in” a higher basis. The “wash sale” rules that apply to losses do NOT apply to gains, so there will be no 30-day waiting period for the repurchase.

Similarly, you may want to prepay medical and educational expenses to take advantage of current tax provisions that may not be available next year.

If you have any questions about your own situation, please contact me before year end.

The following is a partial list of credits and deductions that have changed or expired in 2012: 

  • Educator expenses: $250 maximum deduction for professional educators is no longer available for 2012
  • Tuition deduction for those who itemize. The American Opportunity (“Hope”) Tax Credit is still available for 2012, however.
  • State and local general sales tax deduction for those who itemize
  • Deduction for mortgage insurance premiums
  • Nonrefundable credits can no longer be used to offset alternative minimum tax (AMT)
  • Temporary AMT exemption amounts in effect for the 2010 and 2011 are set to expire (unless Congress passes an “AMT Patch” before the end of the year)
  • Nonbusiness energy credits
  • IRA-to-Charity exclusion

For businesses and investors in income property, these include: 

  • Sec. 179 and 15-year depreciation allowances for certain real estate investments
  • Sec. 179 depreciation $500,000 maximum reduced to $139,000
  • 100% bonus depreciation allowed for certain assets reduced to 50% in 2012
  • Enhanced transportation fringe benefits
  • Reduced built-in gains holding period
  • Research credit
  • Enhanced charitable deductions for computer, book and food inventories
  • S corporation basis adjustment for charitable contributions
  • Work-Opportunity Credit (non-veterans only)
  • 100% exclusion for small business stock (Sec. 1202)
  • Sec. 181 expensing of film and television production costs
  • 7-year motorsports depreciation

If you think any of these might apply to you, contact me if you have any questions.

I anticipate sending out organizers to my returning clients before the end of January. When you receive yours, please take extra care in preparing it and providing all supporting documentation.  

Finally, if you want to file early because you’re expecting a sizable refund or for any other reason, please let me know before mid-January so I can schedule your return for filing before the usual March-April tsunami.

Thanks once again for letting me be your “tax guy,” and best wishes for the holidays.

Yours very truly,

Rick Zalon, CPA

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