Money Matters/To save on 2012 taxes, start now
For a variety of reasons, 2012 will likely bring great uncertainty when it comes to taxes. So if you want to prepare an effective tax plan for 2012, don't wait until year end. Start now by looking ahead at the many issues in flux to see where you might be able to make smart moves to minimize your taxes.
Why the ambiguity?
The vast amounts of ambiguity spring, at least in part, from the federal government's recent struggles to deal with the economic downturn and our slow recovery from it. Tax rates that were lowered to boost the economy are set to go back up, and breaks designed for the same purpose are headed for expiration.
For example, both ordinary income and capital gains tax rates are scheduled to increase in 2013. Meanwhile, a number of tax breaks have been designated for elimination in 2013. These include the personal exemption and itemized deduction phaseout repeal, the higher contribution limits for Coverdell Education Savings Accounts and the American Opportunity education credit.
What's the big deal?
If you're the optimistic sort, you might respond to all of this uncertainty by saying, "What's the big deal? Congress will just extend all of these rates and breaks as usual."
Granted, they might. Or there could be another significant tax bill on the way. But it's even harder than usual to predict what will happen in the coming months because of the increased focus on the budget deficit and the fact that it's an election year.
And while the advantageous rates and breaks we've discussed don't expire until after 2012, a wide variety of tax planning strategies depend on looking ahead at not only the rest of the current year, but also the next year. Your goal is to time income and deductions to your advantage. Yet doing so is more difficult when there's so much uncertainty about what tax rates will apply and what breaks will be available either this year or next.
After all, traditional tax planning often calls for deferring income to the next year and accelerating deductions into the current year in order to defer tax. But these steps could be costly if rates go up, because you'll be pushing taxable income into a year when it will be subject to a higher tax rate. In addition, deductions are more valuable when your rate is higher.
How can you cope?
Although there's no tax-savvy crystal ball that can tell you precisely what's going to happen, you do have plenty of coping measures worth discussing with your tax advisor:
Sell long-term appreciated assets before the favorable 15 percent capital gains rate jumps to 20 percent. This could be an especially beneficial move if you'll also likely be subject to the new Medicare tax on gains next year.
Accelerate income into 2012, where possible. Doing so will help you take advantage of the lower ordinary rate--again, particularly if you'd also be subject to the new additional Medicare tax noted above. If you'll be subject to deduction phaseouts in 2013, consider whether it would make sense to also accelerate deductible expenses into 2012 while the phaseout is repealed.
We do have a couple of caveats to these tips and others you may ponder. First, beware of the alternative minimum tax. Actions that are advantageous for regular income tax purposes could trigger it.
Also, as contradictory as this may sound to this tax-focused discussion, don't think only about taxes. It's important to consider other factors as well, such as your degree of financial security, your financial needs and goals, and your risk tolerance.
Who can help?
In many years, economic uncertainty and market volatility can make it difficult to predict your financial situation. But this year brings notable tax uncertainty as well.
This has been a general discussion and is not intended as advice to anyone. Always discuss your particular circumstances with a qualified advisor before taking any actions.
Norm Grill is a certified public accountant and managing partner of Grill & Partners LLC, accountants and consultants to closely held companies and high-net-worth individuals, with offices in Fairfield and Greenwich. He can be reached at: n.grill@GRILL1.com.