Year-End Tax Planning

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As the end of the year approaches, it is a good time to think of planning moves that will help lower your tax bill for this year and possibly the next. Factors that compound the challenge include turbulence in the stock market, overall economic uncertainty, and Congress’s failure to act on a number of important tax breaks that expired at the end of 2014. Some of these tax breaks ultimately may be retroactively reinstated and extended, as they were last year, but Congress may not decide the fate of these tax breaks until the very end of 2015 (or later). These breaks include, for individuals: the option to deduct state and local sales and use taxes instead of state and local income taxes; the above-the-line-deduction for qualified higher education expenses; tax-free IRA distributions for charitable purposes by those age 70- 1/2 or older; and the exclusion for up-to-$2 million of mortgage debt forgiveness on a principal residence. For businesses, tax breaks that expired at the end of last year and may be retroactively reinstated and extended include: 50% bonus first-year depreciation for most new machinery, equipment and software; the $500,000 annual expensing limitation; the research tax credit; and the 15-year writeoff for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements. Read more

2013 Retirement Contribution Limits and Tax Changes

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With so much drama regarding the “fiscal cliff,” I thought many of my clients would appreciate some “cliff notes” on the changes they’ll see in 2013.  But first, a quick look at some of the new retirement plan contribution limits for 2013:

401k, 403b employee contributions:  $17,500  (up $500 from last year)
401k, 403b age 50+ catch-up contributions:  $5,500 (no change from 2012)

IRA, Roth IRA contributions:  $5,500 (up $500 from last year)
IRA, Roth IRA age 50+ catch-up:  $1,000 (no change from 2012)
Roth IRA Income phase-out range for joint filers: $178,000 – $188,000

TAX CHANGE HIGHLIGHTS (Here are a few major changes.  If anyone would like the 7-page summary of tax changes, please email & I’ll forward it to you):

1.  Payroll taxes will increase 2% for all wage-earners.

2.  Tax rates will stay the same unless your annual earnings are above $450,000 (joint filers) or $400,000 (single filers) who will now fall into the 39.6% tax bracket.

3.  Capital Gains and Dividends will be taxed based on your tax bracket:
– Tax rate BELOW 25%:  0% tax
– Tax rate of 25% or greater (but earnings less than $450,000 joint):  15% tax
– Earnings of $450,000 joint:  20% tax rate plus 3.8% healthcare surtax rate.

4.  Permanent AMT relief:  The AMT exemption amount for joint filers rises from $45,000 to $78,750, and will now be indexed for inflation.

5.  Personal Exemption Phaseout and Limitations on Itemized Deductions (previously suspended) are reinstated for households making $300,000 ($250,000 for single filers) or more.

6.  Tax-free distributions from IRAs for charitable purposes, which expired at the end of 2011, is now revived for 2012 and continued through 2013. Because 2012 has already passed, a special rule permits distributions taken in 2012 to be transferred to charities for a limited period in 2013. Another special rule permits certain distributions made in 2013 as being deemed made on Dec. 31, 2012.

Year-end Financial Planning Strategies

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Most “Fiscal Cliff” financial strategies for year-end reviews are just common-sense financial planning strategies.  Financial crises seem to be the norm, and the possibility of rising taxes will be real for many years to come.  With that in mind, here are some timeless financial suggestions that should be reviewed annually:

  • Tax-advantaged Accounts: Maximize contributions to traditional and Roth 401(k)s, IRAs, and 529 college savings plans.
  • Tax-efficient Rebalancing: Use tax-advantaged accounts to rebalance an asset allocation or to sell appreciated positions. Use index funds and index ETFs, which have high potential for tax efficiency.
  • Asset Location:  Tax-efficient investments belong in taxable accounts and tax-inefficient investments belong in tax-advantaged accounts.
  • Tax Loss Harvesting:  Realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, you can sell the original holding, and then buy back the same securities at least 31 days later.  Contact Clarus for details.
  • Roth Conversion: Convert money from a traditional IRA to a Roth IRA if doing so is expected to produce better long-term tax results for you and your beneficiaries. Distributions from a Roth IRA can be tax-free but the conversion will increase your adjusted gross income in the year you convert.
  • Required Minimum Distributions:  Take your RMD from your IRA or 401k plan (or other employer-sponsored retired plan) if you have reached age 70 1/2.  Failure to take a required withdrawal can result in a penalty of 50% of the amount not withdrawn.  If you turned age 70 1/2 in 2012, you may be able to delay the required distribution to 2013, but if you do, you will have to take a double distribution in 2013—the amount required for 2012 plus the amount required for 2013. Think twice before delaying your distribution—bunching income into 2013 might push you into a higher tax bracket or have a detrimental impact on various income tax deductions that are reduced at higher income levels.
  • Flex Spending Accounts:  Increase the amount you set aside for next year in your employer’s health flexible spending account (FSA) if you set aside too little for this year.
  • W-4 Withholding:  Increase your withholding if you are facing a penalty for underpayment of federal estimated tax.  Doing so may reduce or eliminate the penalty.
  • Give Gifts: Use gift and estate tax exemptions while current tax laws remain favorable.

Fiscal Cliff: A Primer

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Expiring tax breaks coupled with government spending cuts scheduled to begin with the new year have led to concern that a recession will result.  The lame-duck Congress meets this week, and while I don’t have high expectations for a clear tax policy by year-end, I am hopeful that some of the expiring tax breaks (listed below) will be addressed.

Expiring Tax Breaks:

  • 6 tax brackets (10, 15, 25, 28, 33, 35) will revert to 5 tax brackets (15, 28, 31, 36, 39.6)
  • Long-term Capital Gains maximum tax rate will increase from 15% to 20% and dividends will be taxed as ordinary income
  • The temporary 2% reduction in the Social Security portion of the FICA payroll tax will expire at year-end
  • Lower AMT exemption amounts will disappear
  • High AGI households will lose itemized deductions and dependency exemptions
  • The estate tax will revert to the top rate of 55% with a $1 million exemption
  • The IRA charitable rollover/distribution has not been approved for 2012

New Taxes on High Income Individuals ($250,000 AGI MFJ, $200,000 AGI Single):

  • Payroll tax increase of 0.9% for Medicare
  • 3.8% Medicare contribution tax on unearned income

Tax Planning for 2013

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We face the prospect of a darker tax climate in 2013 for investment income and gains. Under current law, higher-income taxpayers will face a 3.8% surtax on their investment income and gains. Additionally, if the EGTRRA and JGTRRA sunsets go into effect, all taxpayers will face higher taxes on investment income and gains, and the vast majority of taxpayers also will face higher rates on their ordinary income.  Stay tuned for specific information as year-end approaches.

Overview of the Tax Provisions in the 2010 Tax Relief Act

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The newly enacted “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010” signed into law on December 17, 2010 is a sweeping tax package that includes, among many other items, an extension of the Bush-era tax cuts for two years, estate tax relief, a two-year “patch” of the alternative minimum tax (AMT), a two-percentage-point cut in employee-paid payroll taxes and in self-employment tax for 2011, new incentives to invest in machinery and equipment, and a host of retroactively resuscitated and extended tax breaks for individuals and businesses. Here’s a look at some of the key elements of the package: Read more

Year-End Tax Planning

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The midterm elections have changed the Congressional landscape, with Republicans winning control of the House of Representatives and picking up seats in the Senate. Even so, it’s too early to know exactly how this will affect open tax issues for 2010 and 2011.

Specifically, when the “lame-duck” Congress returns this month, it must decide whether to “patch” the alternative minimum tax (AMT) for 2010 (increase exemption amounts, and allow personal credits to offset the AMT), as it has done in past years. It also must decide whether to retroactively extend a number of tax provisions that expired at the end of 2009. Read more