Tax planning in uncertain times
Should you accelerate deductions?
If you are a high-income taxpayer and take advantage of itemized deductions, your deductions may be at risk. Currently, taxpayers may deduct overall itemized deductions without any limitations. However, after Dec. 31, 2012, overall itemized deductions may be subject to certain limitations.
However, this may change next year. Without the necessary legislation, high-income individuals may be subject to a reduction in itemized deductions as high as 80 percent.
"If you have major medical expenses or employee-related expenses on the horizon, consider incurring the costs in 2012 to avoid the possible consequences associated with waiting until 2013," Washington says.
Give a little
Two key tax provisions scheduled to expire at the end of 2012 are the estate exclusion of $5.12 million and the current top estate tax rate of 35 percent. Without an extension of these provisions, the estate exclusion level is slated to be reduced to $1 million, and the top rate has the potential to rise to 55 percent. That can be a hefty tax burden on an estate.
Some taxpayers who fear paying high estate taxes decide instead to give their money to loved ones in the form of "gifts." Gifting assets today may generally reduce estate taxes at death. Currently, taxpayers may gift up to $13,000 (in 2012) per donee, up to an unlimited number of donees, without incurring any gift taxes.
"If taxpayers are contemplating giving gifts in the future, they should seriously contemplate doing so prior to the end of 2012," Washington says.
Transferring highly appreciated assets to donees in lower tax brackets allows the taxpayers who are transferring the assets to reduce their estate. It also gives the donees the opportunity to take advantage of lower capital gain rates, he says.
"These moves may be worthwhile despite the tax uncertainties," Washington says.
However, Washington warns that taxpayers should weigh other factors, such as the "kiddie tax" and the effect of the transfer as it relates to proposed lifetime exclusion amounts for 2013 and subsequent years.
"Taking advantage of the $5 million exclusion may come with consequences if the exclusion amount is reduced in the future and Congress fails to implement provisions to protect those individuals who took advantage of the exclusion available in 2012," Washington says.
Before making gifts in 2012, Washington recommends asking your adviser to carefully calculate the risks associated with the kiddie tax and the possible reduction in the exclusion amounts.
Make a plan to plan
Whether planning on your own or meeting with an adviser, take the time to understand which of these tips will reduce your tax bill. There are many uncertainties at the moment, but taxpayers can successfully save valuable tax dollars by focusing on these steps.
Remember: your choice, your future!
We would like to thank Kemberley Washington, CPA, assistant dean of student programs at Dillard University in New Orleans, for her contribution.