Don’t Let Key Tax Advantages Expire This Year Unused
Keeping up with the shifting sands in certain key areas, like taxes, can be a very challenging part of financial literacy. The world of taxes is one of the most volatile and most critical to individuals, families, and companies. Insensitivity to the tax implications of their activities, both in timing and proper handling, has cost many consumers and businesses their livelihood.
In that context, I’m dedicating this article to highlighting ten tax changes which will likely happen at the end of 2012, barring last minute congressional action. By reviewing your personal situation today, you may be able to take action before the end of the year to yield significant tax savings. These points are not meant to be your legal guidance on any given case, but merely an alert that changes are happening which could impact you if you have transactions in relevant areas:
- Individual income tax rate reductions expire. The top marginal tax rate reduction for ordinary income from the 2001 Tax Relief Act is scheduled to expire this year, raising the top tax rate from 35% up to 40%. Alternative Minimum Tax indexing will also expire, meaning more people will suddenly become subject to and have to pay this tax. Accelerate your income into 2012, if possible.
- Long-term capital gains rate reductions will expire. Similarly, capital gains tax relief will expire this year, raising the top rate from 15% to 20%. Business owners considering a sale of their business, or consumers selling investments, may benefit by closing the sale by year-end to take advantage of reduced long-term capital rates. Review your portfolio to determine if you should sell certain investments before year-end to take advantage of the lower tax rates.
- Dividend income tax rate reductions will expire. If you have “qualified” dividends due to you this year, don’t let the transaction date slip into next year, or you will pay ordinary income rates on the dividends, rather than the long-term gain rate of 15%. Review your investment portfolio of dividend paying stocks in light of these changes. You may not want to make any changes but you need to be aware of the increase in taxes they will be subject to.
- Medicare tax on investment income goes up. Two new Medicare-related taxes take effect in 2013: an additional 0.9% payroll tax on high-wage earners, and a 3.8% tax on the unearned income of high-income individuals. If you have high wages and investment income, you could be subject to both tax increases. Consider taking investment income in 2012 to avoid these.
- Hospital insurance tax increases. Another “Bush Tax Cuts” expiration in 2012 is an additional 0.9% hospital insurance tax that will be imposed on earned income of high-income individuals. Here is another case where income should be accelerated in 2012 where possible.
- Lifetime gift tax exemption will decrease, and estate tax rate goes up. The amount that can be gifted from a tax payer over a lifetime before the gift tax applies will decrease from $5.12 million to $1 million. In addition, the estate and gift tax rate will increase from 35% to 55%. It is very important to review your estate planning and gifting practices to optimize your situation before year end.
- Tax relief for businesses acquiring equipment will be eliminated. Businesses considering a capital equipment investment should act now to take full advantage of available tax benefits. For a limited time, qualifying businesses can write off 50 percent of the cost to acquire eligible equipment on 2012 tax returns. This is a great benefit to small businesses that will expire at the end of the year. Review your business equipment needs and act before year end.
- K-12 component of a Coverdell tax-free savings account expires. Coverdell savings accounts have been tax-free if used to send students to private or religious K-12 schools. The K-12 component of this tax credit expires at the end of this year.
- Business accelerated depreciation options will be eliminated. Since 2008 some level of accelerated depreciation — or bonus — has been available to equipment owners. Be sure to take this bonus depreciation (additional first-year depreciation) for business assets before it expires at the end of 2012.
- Business payroll tax cut expires. The two percentage point reduction in the employee Social Security payroll tax rate in effect for calendar years 2011 and 2012 was designed to stimulate the economy by increasing workers’ take home pay. This reduction will no longer apply in 2013 and your employee’s will see a reduction in their take home pay.
If any of these sounds like it may be relevant to your personal situation, or your business situation as an entrepreneur, now is the time to talk to your tax expert to understand the details, and implement the best strategy for your individual and business financial strategy.
One of the basic precepts of financial literacy is that every red-blooded American has to file their tax return each year as well as the right to minimize the amount of income taxes he or she owes, according to the law. Failure to file your taxes, or to do it right, can negate the value of budgets, managing credit, and planning for your retirement. Now is the time to make the necessary moves that ensure you are only paying what you need to and positioning yourself to maximize an enjoyable retirement later.