Year End Fiscal Cliff Tax Strategies
Boca Raton Accountant
According to what, if any, tax legislation Congress can enact within the next many weeks, we'll likely have a tax increase for 2013 and later on years. Nevertheless, the following are some key strategies that should be considered.
Business Expense Strategies
An advanced cash-basis taxpayer and business proprietor operating as a possible S corporation, partnership or sole-proprietorship, you pay tax on the business’s net profit on your own individual federal taxes return. The company itself will not spend the money for tax. Therefore, a rise in tax rates will probably affect you. Now it is time to organize because of these tax rate hikes. Specifically, pay attention to when you incur deductible business expenses. You might postpone a few of these expenses to some future year when tax rates could be higher. On the other hand, businesses with carry-forward losses will benefit more by accelerating income (for the extent possible depending on tax law) into 2012 and deferring expenses to 2013 or later.
Local and state Tax Payment Strategies
Taxpayers frequently have some flexibility in determining when you make state and local tax payments. Such payments include taxes, property and property taxes. Many of these items might be deductible for you based on your tax situation. Review your situation to find out whether you have flexibility to obstruct these payments into next season. The delayed payment, and subsequent rise 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 to 2013. It may be advantageous to separate your charitable giving budget involving the two years. A charitable deduction (as long as it is not at the mercy of limitation based on your income) might be a little more valuable in 2013 than in 2012. After a little analysis, you may find it more beneficial to tear down remaining 2012 charitable contributions and allocate more assets (cash or securities) for your 2013 charitable budget. If you determine to wait for 2013 to produce charitable gifts, you should consider making them with appreciated long-term assets instead of cash. Given the prospect of rising tax rates, this tactic deserves a second look. If the method is appropriate, the huge benefits are twofold:
When gifting appreciated stock to charity you avoid incurring capital gains taxes on the stock
A present to some qualified charity offers a tax break, towards the extent it is not limited depending on your income.
Be sure to discuss this option to insure expenditures are fully deductible.
With regards to payments out of your employer, consider whether you anticipate receiving a bonus or perhaps a lump sum payment due to retirement or perhaps a job transition, and talk with your employer regarding your flexibility inside the timing of getting the payment. Some workers are offered transition payment schedules that stretch over more than one year. This isn't always ideal when tax rates are required to boost as with 2013. An assessment of the payment amount, date(s) of receipt along with your expected taxes bracket this year and future will become important in deciding or negotiating when you should receive this income.
With regards to IRA or annuity distributions, taxable distributions from IRAs or annuities really are a concern in a rising-tax-rate environment. In case you are required to take minimum distributions from a retirement plan, IRA or inherited IRA, you’ll wish to factor that into future-tax-year projections. Taking mandatory distributions boosts your taxable income and could require either a boost in your withholding or, perhaps, paying estimated taxes quarterly to avoid an underpayment penalty. If you’re considering taking an elective distribution within the next few years, by taking your distribution next year when income-tax-rates are lower may be beneficial. This plan is especially timely in terms of potential distributions and recognition of taxable income due to a Roth IRA conversion.
IRA to some Roth IRA Conversion Strategies
Anyone, regardless of income, now can convert a conventional IRA with a Roth IRA. The great things about converting are the prospect of tax-free income in retirement and also the ability to pass on assets that the heirs can withdraw tax-free after your death. However, you might incur income taxes in the year you're making the conversion. Because rates are scheduled to improve on January 1, 2013, if you’re considering converting, you could be more satisfied carrying it out this year instead of in 2013.
Accelerating Long-Term Capital Gains Strategies
January 1, 2013, may see no more historically low long-term capital gains rates. Just how much these rates increases depends upon your ordinary income tax rate bracket. Various Congressional proposals are already made that included alternative schedules, with some affecting only higher-bracket taxpayers; however, at this stage they remain exactly that - proposals. Because it stands now, you may find it good for sell appreciated securities or assets that you’ve held in the future this year to adopt benefit of this year’s lower capital gains tax rates. This plan could be particularly appropriate in certain situations: You are able to use the current 0% long-term capital gains rate. If the net taxable income, as well as your long-term capital gains, is less than $70,700 (joint filers) or $35,350 (single filers) this year, you'll be inside the 10% or 15% ordinary income tax bracket, therefore you may be able to realize some tax-free long-term capital gains. In case your capital gains push you over your threshold, or else you are in a higher tax bracket, then some or all the gains will probably be taxed in the 15% long-term capital gains rate.
If you hold a concentrated equity position, meaning a substantial position in one stock which includes appreciated over time, selling a portion with the shares and purchasing other investments using the proceeds can help you diversify and reduce the marketplace risk within your portfolio. For those who have other goals which entail recognizing the gain, then you should measure the various ways of help manage the potential risk of a concentrated position and 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 might like to you should think about selling a percentage this coming year. Doing this will help you prevent the potential tax rate increase that is scheduled for long-term capital gains recognized in 2013 and thereafter.
Should you own property or business assets, the upcoming tax rate changes should prompt one to consider how you are managing those assets. In some cases, the customer and seller for these assets can structure the sale to ensure that proceeds are paid over more than one tax year. Typically, this tactic helps the seller manage his / her tax liability. However, considering that both ordinary income-tax-rates and long-term capital gains tax rates are scheduled to go up in 2013, you might like to attempt to finish a sale, and receive its proceeds, in 2012. If that is difficult, then perhaps electing from an installment sale treatment and accelerating the income recognition all to 2012 could be a choice.
Think ahead before selling if you decide to sell appreciated securities next year to take advantage of the low long-term capital gains rates, but be strategic in the method that you take action. For the percentage of your portfolio you have designated for long-term goals, review and rebalance your allocation so you are 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 future you might need less rebalancing, that ought to lessen increases in size that you realize if the tax rates are higher.
Accelerating Capital Losses Strategies
Typically, investors consider selling investments near year-end to appreciate losses to offset capital gains or as much as $3,000 in ordinary income. However, for those who have modest unrealized losses in 2012, and do not anticipate generating sizable capital gains, you could consider waiting to understand those losses until 2013.
Offsetting long-term capital gains which can be taxed at 20% (the 2013 rate) provides more tax savings than while using losses to offset gains taxed at 15% (the 2012 rate). You’ll may need to look closely to project any potential capital gains (and don’t forget about long-term capital gains distributions from mutual funds). For investors whose income (including long-term capital gains) is within the 10% or 15% tax bracket, harvesting losses won't provide a tax benefit when it only reduces long-term capital gains. Losses more than gains will give you a nominal tax savings at best and may provide more appeal if left money for hard times.
If, however, you have substantial capital losses or capital loss carry-forwards, it may often be challenging to consume all those losses. In this case, it probably doesn't seem sensible to postpone offsetting capital gains or waiting to identify gains.
Rebalancing Your Portfolio Strategies
Generally, an experienced dividend is a paid with a U.S. corporation or an international corporation that trades over a U.S. stock trading game. You may also get a qualified dividend should you hold shares inside a mutual fund that invests during these forms of corporations.
Currently, qualified dividends are taxed in a maximum 15% rate - like long-term capital gains; however, in 2013, they are scheduled to be taxed at ordinary income tax rates, which could 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 held in taxable accounts using the following strategies.
Think about adding growth-stock holdings. If you don’t need current income, you might want to think about the features of shifting a few of your equity allocation to growth stocks. Or you will reposition a portion of one's tax-deferred account allocation to dividend-paying stocks, the location where the dividends will probably be shielded from current taxation. Having a dividend-paying stock, your total return is founded on both growth and income, and also the income portion may be taxed as standard income beginning in 2013.
Should you hold a rise stock in the future, any appreciation inside the stock’s price will not be taxed before you market it. At that point, you'd owe long-term capital gains taxes (so long as you held the stock multiple year), that will still be lower than ordinary income rates despite 2012. Because this strategy involves issues surrounding both your long-term asset allocation and taxation, careful analysis must be implemented to help determine the proper technique for your circumstances.
Reassess your tax-exempt bond holdings. If you want income, carefully weigh the advantages and disadvantages of tax-exempt bonds versus dividend-paying stocks. With rising tax rates, tax-exempt income may be more inviting. 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. For instance, bond investments might not be too equipped to guard against inflation as stocks. Additionally, keep in mind that some municipal bond interest may trigger the AMT tax. Also, bond prices will fluctuate and move inversely to interest levels. If rates of interest increase, your bond investments’ principal value will fall. We recommend continual portfolio monitoring and also the outlook for the economy and the markets, so any proactive changes can be created when needed.
You’ll should also evaluate the investment’s yield. At 2012 income tax rates, a tax-exempt bond having a 4% yield will be comparable to a taxable investment having a 5.3% yield for someone inside the 25% federal income tax bracket. If income tax rates increase, this same taxpayer would need to find a taxable investment with a 5.6% yield to build the same after-tax income because the 4% tax-exempt bond.
If you choose to alter your portfolio’s investment mix, understand that overall asset allocation remains suitable for neglect 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 subject to a brand new (Obamacare) Medicare tax. If you’re either in group, an additional 3.8% tax will probably be applied to some or all your investment income, including capital gains. This is in addition to ordinary and capital gains taxes that you already pay!
Exercise Employer-Granted Stock Options
In case your company grants you stock options as part of your compensation package, you could have either (or both) nonqualified stock options (NSOs) or incentive stock options (ISOs). You will want to comprehend the choices you've got and also the tax consequences of exercising each type of stock option. NSOs provide you with the option to exercise the options sometime between your vesting date and the expiration date. (Visit your stock option plan document or your employee benefits representative if you don't know these dates.) Once you exercise an NSO, the real difference between your stock’s fair market price as well as the exercise price will probably be taxable compensation that’s reported in your W-2. For those who have vested options and the possibility to exercise them next year or 2013, you’ll must determine in which year it might be more advantageous to exercise your options and recognize the wages. You might like to project your taxable income for 2012 plus a later year then decide at which time it may be less taxing to workout your alternatives and realize the excess income. You’ll should also think about the stock’s market outlook, its valuation and 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 (just like NSOs) or long-term capital gains. To profit from your potential long-term capital gains tax treatment (having its 15% top rate in 2012 and 20% top rate in 2013) versus ordinary income-tax-rates (which range up to 35% this year and 39.6% in 2013), you have to hold the stock you receive several year in the exercise date and most a couple of years from the grant date. Because of the holding period requirement, it’s obviously too far gone to freeze the 15% capital gains tax rate on options you haven't yet exercised. However, in the event you exercised options next year or earlier yet still contain the shares, you’ll want to weigh the advantages and disadvantages of promoting them and recognizing gains next year versus later years.
You should also know that if you exercise and hold shares from the ISO exercise, the taxable spread (the real difference between the stock price about the exercise date along with your option cost) will probably be taxable income for AMT purposes in the year when the exercise occurs.
If you exercise your ISOs and then sell without meeting this holding period, you will recognize taxable W-2 compensation just like NSOs. As a result of lower capital gains rates, you may find it more attractive to carry ISO shares rather than selling them soon after your exercise. Just make sure you consider any ATM tax potential.
If, instead, you decide to exercise ISOs and then sell the stock, you might want to consider selling by year-end to consider good thing about 2012’s lower ordinary income tax rates. Just like NSOs, you’ll wish to the market outlook for that stock, inside your decision-making process.
Boca Raton Accountant
Anthony Caruso, CPA has practiced being a cpa and investment advisor for upwards of 3 decades. Caruso and Company, P.A. can be a Registered Investment Advisor offering paid management of their money, 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 folks should check with their advisors for appropriate advice relating to their individual circumstances.