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Year End Fiscal Cliff Tax Strategies
bocaratoncpa
CPA Boca Raton


According to what, if any, tax legislation Congress can enact in the next many weeks, we'll likely notice a tax increase for 2013 and later on years. Having said that, listed below are some key strategies that ought to be considered.

 

Business Expense Strategies

If you're a cash-basis taxpayer and business owner operating as a possible S corporation, partnership or sole-proprietorship, you spend tax about the business’s net profit on your own individual federal taxes return. The company itself will not give the tax. Therefore, a boost in tax rates will probably affect you. Now it's time to organize of these tax rate hikes. Specifically, seriously consider when you incur deductible business expenses. You may postpone many of these expenses with a future year when tax rates might be higher. On one other hand, businesses with carry-forward losses may benefit more by accelerating income (to the extent possible depending on tax law) into 2012 and deferring expenses to 2013 or later.

 

Local and state Tax Payment Strategies

Taxpayers often have some flexibility in determining when you should make local and state tax payments. Such payments include taxes, real estate and personal property taxes. All of these items may be deductible for you according to your tax situation. Research your situation to ascertain whether you've got flexibility to obstruct these payments into next season. The delayed payment, and subsequent boost in tax deductions, may provide greater tax savings the coming year if tax rates increase.

 

Timing Charitable Contributions Strategies

As you consider additional 2012 charitable contributions, you need to project forward to 2013. It could be advantageous to split your charitable giving budget between your two years. A charitable deduction (provided that it's not subject to limitation depending on your earnings) could potentially be more useful for 2013 in comparison to 2012. If you do analysis, it may seem more advantageous to lower your remaining 2012 charitable contributions and allocate more assets (cash or securities) in your 2013 charitable budget. If you determine to watch for 2013 to make charitable gifts, you should think about which makes them with appreciated long-term assets instead of cash. Given the prospect of rising tax rates, this strategy deserves a second look. Once the method is appropriate, the huge benefits are twofold:

 

When gifting appreciated stock to charity you avoid incurring capital gains taxes about the stock

 

Something special with a qualified charity provides a tax deduction, towards the extent it is not limited according to your revenue.

 

Make sure to discuss this option to insure expenditures are fully deductible.

 

Timing Income

With regards to payments out of your employer, consider whether you anticipate receiving a bonus or perhaps a lump sum payment as a result of retirement or perhaps a job transition, and talk with your employer about your flexibility within the timing of finding the payment. Some employees are offered transition payment schedules that stretch over several year. This isn't always ideal when tax rates are required to increase such as 2013. A review of the payment amount, date(s) of receipt as well as your expected income tax bracket this year and future is important in deciding or negotiating when you receive this income.

 

Regarding IRA or annuity distributions, taxable distributions from IRAs or annuities really are a concern inside a rising-tax-rate environment. If you're necessary to take minimum distributions from your retirement plan, IRA or inherited IRA, you’ll wish to component that into future-tax-year projections. Taking mandatory distributions boosts your taxable income and could require either a rise in your withholding or, perhaps, paying estimated taxes quarterly to avoid an underpayment penalty. If you’re considering taking an elective distribution in the next several years, taking that distribution next year when income-tax-rates are lower a very good idea. This strategy is particularly timely with regards to potential distributions and recognition of taxable income as a result of a Roth IRA conversion.

 

IRA to some Roth IRA Conversion Strategies

Anyone, irrespective of income, now can convert a conventional IRA to some Roth IRA. The great things about converting would be the prospect of tax-free income in retirement and also the capability to give assets your heirs can withdraw tax-free after your death. However, you might incur taxes in you are making the conversion. Because rates are scheduled to increase on January 1, 2013, if you’re considering converting, you might be best carrying it out this coming year as opposed to in 2013.

 

Accelerating Long-Term Capital Gains Strategies

January 1, 2013, could see get rid of historically low long-term capital gains rates. How much these rates increases depends upon your ordinary taxes rate bracket. Various Congressional proposals have been made that included alternative schedules, with some affecting only higher-bracket taxpayers; however, at this stage they remain that - proposals. Because it stands now, you may find it good for sell appreciated securities or assets that you’ve held for a long time next year to adopt benefit of this year’s lower capital gains tax rates. This strategy could be particularly appropriate in certain situations: It is possible to make use of the current 0% long-term capital gains rate. In case your net taxable income, together with your long-term capital gains, is less than $70,700 (joint filers) or $35,350 (single filers) this year, you will end up within the 10% or 15% ordinary tax bracket, and that means you may be able to realize some tax-free long-term capital gains. If your capital gains push you over your threshold, or you have been in a greater tax bracket, then some or every one of the gains will probably be taxed at the 15% long-term capital gains rate.

 

Should you hold a concentrated equity position, meaning a substantial position in one stock which includes appreciated over time, selling a portion of the shares and purchasing other investments using the proceeds can help you diversify minimizing industry risk inside your portfolio. When you have other goals which involve recognizing the gain, then you should assess the various strategies to help manage the chance of a concentrated position as well as the tax liability that may occur upon selling an investment. However, given the limited window of opportunity for 2012’s historically low long-term capital gains tax rates, you may want to seriously consider selling a percentage this year. Doing so can help you avoid the potential tax rate increase that's scheduled for long-term capital gains recognized in 2013 and thereafter.

 

In the event you own property or business assets, the upcoming tax rate changes should prompt one to consider the method that you are managing those assets. In some cases, the purchaser and seller of these assets can structure the sale in order that proceeds are paid over several tax year. Typically, this tactic helps the owner manage his or her tax liability. However, considering the fact that both ordinary income-tax-rates and long-term capital gains tax rates are scheduled to rise in 2013, you might like to try to develop a sale, and receive its proceeds, next year. If that's not possible, restoration electing away from an installment sale treatment and accelerating the income recognition all to 2012 might be a choice.

 

Think ahead before selling if you choose to sell appreciated securities in 2012 to adopt advantage of the lower long-term capital gains rates, but be strategic in the method that you get it done. For that part of your portfolio you've designated for long-term goals, review and rebalance your allocation so that you will have been in an improved investment management position in the years ahead. Doing so will allow you to reap the benefits of 2012’s lower long-term capital gains tax rates, plus long term you may need less rebalancing, which will reduce increases in size that you simply realize when the tax rates are higher.

 

 Accelerating Capital Losses Strategies

Typically, investors consider selling investments near year-end to realize losses to offset capital gains or as much as $3,000 in ordinary income. However, when you have modest unrealized losses this year, , nor anticipate generating sizable capital gains, you might consider waiting to appreciate those losses until 2013.

 

Offsetting long-term capital gains which can be taxed at 20% (the 2013 rate) will provide more tax savings than while using losses to offset gains taxed at 15% (the 2012 rate). You’ll will want to look closely to project any potential capital gains (and don’t ignore long-term capital gains distributions from mutual funds). For investors whose income (including long-term capital gains) is within the 10% or 15% income tax bracket, harvesting losses will not supply a tax benefit whether it only reduces long-term capital gains. Losses more than gains will offer you a nominal tax savings at best and could provide more value if left money for hard times.

 

If, however, you've substantial capital losses or capital loss carry-forwards, it could often be difficult to use up all those losses. In this case, it probably doesn't make sense to postpone offsetting capital gains or waiting to acknowledge gains.

 

Rebalancing Your Portfolio Strategies

Generally, a professional dividend is but one paid by a U.S. corporation or even an international corporation that trades over a U.S. stock trading game. It's also possible to be given a qualified dividend in the event you hold shares in a mutual fund that invests over these types of corporations.

 

Currently, qualified dividends are taxed with a maximum 15% rate - like long-term capital gains; however, in 2013, they are scheduled being taxed at ordinary income-tax-rates, which may be a maximum 39.6% rate (and potentially an additional 3.8% Obamacare surtax on comfortable living taxpayers). Given this anticipated change, you might want to consider reallocating the portion your portfolio locked in taxable accounts using the following strategies.

 

Attempt to add growth-stock holdings. If you don’t need current income, you might like to think about the features of shifting a number of your equity allocation to growth stocks. Or you will reposition a portion of your tax-deferred account allocation to dividend-paying stocks, the location where the dividends will be shielded from current taxation. Having a dividend-paying stock, your overall return is based on both growth and income, and also the income portion could be taxed as standard income starting in 2013.

 

Should you hold a growth stock for a long time, any appreciation in the stock’s price will never be taxed unless you sell it. When this occurs, you'd owe long-term capital gains taxes (so long as you held the stock multiple year), that will nevertheless be below ordinary income rates despite 2012. Because this strategy involves issues surrounding both your long-term asset allocation and taxation, cautious has to be done to help determine the right technique of your circumstances.

 

Reassess your tax-exempt bond holdings. If you need income, carefully weigh the pros and cons of tax-exempt bonds versus dividend-paying stocks. With rising tax rates, tax-exempt income may be more desirable. Dividend-paying stocks risk having their dividend reduced or eliminated altogether. Also, tax-exempt bonds are generally less volatile than stocks.

 

However, tax-exempt investments have inherent risks. As an example, bond investments is probably not as well equipped to protect against inflation as stocks. Furthermore, remember that some municipal bond interest may trigger the AMT tax. Also, bond prices will fluctuate and move inversely to interest levels. If interest rates increase, your bond investments’ principal value will fall. We recommend continual portfolio monitoring as well as the outlook for the economy as well as the markets, so any proactive changes can be created when needed.

 

You’ll should also assess the investment’s yield. At 2012 income-tax-rates, a tax-exempt bond with a 4% yield could be similar to a taxable investment using a 5.3% yield for an individual within the 25% federal taxes bracket. If income-tax-rates increase, this same taxpayer will have to look for a taxable investment using a 5.6% yield to build exactly the same after-tax income because the 4% tax-exempt bond.

 

If you choose to change your portfolio’s investment mix, remember that overall asset allocation remains appropriate for ignore the goals, time horizon and risk tolerance.

 

Medicare Tax on Investment Income Strategies

From 2013, married filing joint taxpayers with incomes over $250,000 and single taxpayers with incomes over $200,000 will be at the mercy of a brand new (Obamacare) Medicare tax. If you’re in either group, yet another 3.8% tax will be applied to some or all your investment income, including capital gains. This will be in addition to ordinary and capital gains taxes that you simply already pay!

 

Exercise Employer-Granted Commodity

If the company has granted you investment as part of your compensation package, you may have either (or both) nonqualified commodity (NSOs) or incentive commodity (ISOs). You'll want to understand the choices you've and the tax consequences of exercising every type of stock option. NSOs supply you with the choice to exercise your options sometime between your vesting date and the expiration date. (Call at your stock option plan document or maybe your employee benefits representative unless you know these dates.) When you exercise an NSO, the main difference between your stock’s fair market value as well as the exercise price will be taxable compensation that’s reported on your W-2. If you have vested options as well as the opportunity to exercise them in 2012 or 2013, you’ll need to determine where year it could be more advantageous to workout the options and recognize the wages. You may want to project your taxable income for 2012 and a later year and then decide after which it could be less taxing to workout your alternatives and realize the excess income. You’ll want to look at the stock’s market outlook, its valuation as well as the options’ expiration date, in your decision-making process.

 

ISOs are somewhat more complex since your holding period determines if the exercise proceeds are taxed as everyday income (much like NSOs) or long-term capital gains. To benefit in the potential long-term capital gains tax treatment (using its 15% top rate this year and 20% top rate in 2013) versus ordinary income tax rates (which range up to 35% in 2012 and 39.6% in 2013), you have to contain the stock you obtain more than one year from the exercise date and most a couple of years from the grant date. Because from the holding period requirement, it’s obviously too far gone to lock in the 15% capital gains tax rate on options you have not yet exercised. However, should you exercised options this year or earlier and still contain the shares, you’ll desire to weigh the pros and cons of promoting them and recognizing gains in 2012 versus old age.

 

It's also wise to be aware that should you exercise and hold shares out of your ISO exercise, the taxable spread (the main difference involving the stock price about the exercise date as well as your option cost) will be taxable income for AMT purposes in the year in which the exercise occurs.

 

If you exercise your ISOs and sell without meeting this holding period, you may recognize taxable W-2 compensation just like NSOs. Because of the lower capital gains rates, it may seem more desirable to hold ISO shares as opposed to selling them just after your exercise. Just be sure to consider any ATM tax potential.

 

If, instead, you choose to exercise ISOs then sell the stock, you might like to consider selling by year-end to adopt benefit of 2012’s lower ordinary income-tax-rates. Just like NSOs, you’ll desire to the market outlook for the stock, in your decision-making process.
CPA Boca Raton

Anthony Caruso, CPA has practiced as a certified public accountant and investment advisor for over 3 decades. Caruso and Company, P.A. is really a Registered Investment Advisor offering paid management of your capital, tax and financial planning. Information contained above just isn't intended to be a suggestion to get or sell any specific investments, or take specific tax actions and people should talk to their advisors for appropriate advice associated with their individual circumstances.

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