Year-end tax planning is more challenging than normal this year due to the uncertainty over 2013 taxes. One thing we do know is the new Medicare surtaxes, which were created by last year's healthcare reform legislation, raise tax rates for high-income earners.
A new 0.9 percent Medicare surtax will apply to income from wages and self-employment earnings in excess of $250,000 for married taxpayers filing a joint tax return and $200,000 for single taxpayers.
The new Medicare surtax on unearned income is 3.8 percent and is applied to the lesser of investment income and adjusted gross income using the same high income limits. "Unearned income" subject to the investment surtax include passive income such as rental income, interest and dividend income, annuities, royalties and taxable capital gains.
While the Medicare surtaxes are a certainty for 2013, the income tax rates for 2013 are still unknown. If the Bush tax cuts are not renewed, all income tax rates, including capital gains rates, will increase. Additionally, the 'payroll tax holiday' that for the past two years has reduced the Social Security tax on wages and self-employment income, will expire. This will increase social security taxes paid by employees and self-employed people by 2 percent on earnings up to $113,700. Even if the Bush tax cuts are renewed, it's conceivable that the cuts will not apply to upper-incomers.
Taxpayers that may be affected by the Medicare surtaxes have different tax considerations than those taxpayers below the high-income thresholds.
* Consider selling appreciated assets in 2012 to lock in the lower tax rate on these gains. Appreciated assets include stocks, rental properties, and businesses. An installment sale will not lock in the lower rates as income received is taxable in the year it is received regardless of the installment sale.
* Accelerate income but don't defer expenses. Deferring compensation to 2013 is not a good idea if doing so pushes income above the surtax threshold. This also applies to deferring income and accelerating expenses in self-owned S-Corporations or LLCs as these entities pass income through to owners to be taxed at the individual's income tax rate.
* Convert traditional IRAs to Roth IR's. Regular IRA payouts aren't subject to the surtax but they do raise your adjusted gross income which for high-incomers may create surtax problems.
Taxpayers below the income thresholds should consider taking the more standard strategy of deferring income and accelerating expenses.
There are also strategies that apply to all taxpayers in 2012.
* Maximize retirement contributions. Retirement contributions are calculated based on the type of plan and may be limited by income thresholds. Taxpayers over 50 years old can frequently make "catch-up" contributions in addition to the base contribution. Retirement contributions have different deadlines depending on the type of plan.
* Contribute up to $6,250 to an HSA (health savings account) if you have family coverage under a high deductible health plan. The deadline for the 2012 contribution is April 15, 2013.
* Make charitable contributions.
* Purchase business assets by Dec. 31 to take advantage of 50 percent bonus depreciation.
* Purchase a new SUV for your business. Even at 70 percent business use, you can deduct a minimum of $17,500 of the cost. The fully loaded gross weight must be over 6,000 pounds.
* Purchase a new pickup truck for your business. The fully loaded gross weight must be over 6,000 pounds. You may be eligible to deduct up to 100 percent of the cost.
* Pay your kids. Wages you pay your children from your sole proprietorship or husband-wife LLC or partnership are not subject to Social Security and Medicare and will likely be taxed at a lower rate.
* If you are an employee, regularly review and adjust your tax withholding to avoid overpaying. A big tax refund is an interest-free loan to the government. Tax refunds are also guaranteed to be slower due to measures the IRS is taking to combat identity theft.
* If you are an estimated tax payer, consider making your payments on EFTPS.GOV. Payments can be automated and spread over 12 months to avoid those big quarterly payments.
* IRS correspondence is at an all-time high due to the Tax Identification Number (TIN) Matching Program which has been fully implemented by the IRS. Minimize your exposure by sending all your customers an updated form W-9 before Jan. 15, 2013, to insure incoming 1099's report your correct name and TIN.
Finally, always contact your tax advisor before completing transactions that may have tax implications.
Tim Nelson is a principal in Evans Nelson & Co. CPAs in Reno. Contact him at 775-825-6008 or through bestcpareno.com.
