As you are no doubt aware there is some uncertainty in the tax planning field now. With the Bush-era tax cuts in line to expire at the end of this year the future of your tax rates will depend on who is elected in November and which party controls the US House and Senate. So the challenge today is to plan in a way that will minimize your tax exposure now as well as into the future all the time not knowing what the future will be bringing!
One thing is easy to see, for me anyway, and that is the lower tax rates for everyone will not be carrying forward. Maybe the lower rates will stay in place for individuals earning under $150,000 and maybe not. What I do believe, however, that the 2013 tax rates will not be lower than the 2012 tax rates so, with that in mind, it is probably a safe bet to implement a strategy to shift income into 2012. This could save considerable tax dollars and it is probably be a low-risk move.
A second area to look at is the tax rate on capital gains. For 2012 the long-term capital gain rate is 15% unless you are in the lower tax brackets (10/15% based on your taxable income), in which case the rate is 0%. If the Bush-era tax cuts are left to expire, the rate will be 20% (or 15% in the lower tax brackets). So there is a possible 5% to 15% difference in tax rates; this possibility existing, it could make sense to sell property with a gain now. If you so choose you could repurchase the property right away, thereby recognizing the capital gain when you make the sale (2012) and have the property back at a higher tax basis going forward. A caution here is in order: this strategy is based on tax considerations and you should not begin your investment philosophy with tax considerations but with economic realities. This is an idea only, but you need to consult with your investment advisor before you try any of the tax ideas here.
Dividends are another area to look at. For 2012 the maximum tax rate on qualified dividends is 15%, the same as the capital gain rate. With no changes, in 2013 dividends will be taxed at ordinary income tax rates, which could be as high as 39.5%. For regular corporations it may make good tax sense to authorize a special dividend payable before the end of 2012 to your shareholders.
There may be other moves you can make and the above are only ideas of what is possible. Before you implement any strategy it is advisable to consult your tax advisor (and your investment advisor) to be sure you are using strategies that are most effective and that you will be getting the benefits you need.
Don’t let the uncertainty of Congress, the elections or the tax code changes immobilize you into not considering your options!
Jeremiah K. Murphy, CPA is an accounting firm providing tax services, audits and business consulting.