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Year-End Tax Planning Tips

December 1, 2012

By Nassif E. Shammaa, CPA

A Federal Tax rate hike will be more of a reality than a probability. All the indications are leading to higher Federal tax rates in 2013 because some or all of the so called “Bush-era” tax cuts are scheduled to expire after December 31, 2012. The 10% tax rate may disappear and the maximum tax rate of 35% may increase back to pre-Bush 39.6% rates.

Tax planning and strategizing before the end of 2012 is very crucial given the looming tax hikes. Here are some of the taxes and tax rates that have a high probability of changing or introduced and some strategies to minimize their effect on your taxes:

Nassif E. Shammaa1. A new Medicare 3.8% surtax will be imposed on certain income categories for singles with Modified Adjusted Gross Income over $200,000 and married couples with MAGI over $250,000. Taxpayers with MAGI close to these limits should consider shifting income into 2012 to stay below these limits thus avoiding the surtax in 2013.

2. Effective January 1, 2013, higher income individuals will be subject to an additional 0.9% HI (Medicare Tax). This additional HI tax will be imposed on wages and self-employment income in excess of $200,000 for singles ($250,000 for married couples).

3. Long-Term (assets held longer than one year) Capital Gain tax rates are scheduled to increase by 5% (from a rate of 15% to 20%) for most tax payers. If you are planning on selling investments with built in gains in the near future, it may be more beneficial to sell before the end of 2012. An investor that sells investments in 2012 with a $50,000 capital gain will pay $2,500 less taxes had the investments been sold in 2013 and possibly avoid the 3.8% surtax in 2013.

On the other hand, you may want to postpone selling investments that generate losses until after December 31, 2012.

4. Taxes on certain Dividend Income may lose the 15% maximum tax rate and will be taxed at the ordinary income tax rates reaching up to 39.6% in 2013. Although many taxpayers can not affect the timing of dividends distribution, certain taxpayers can.

If you own stock in a corporation and you have undistributed earnings, it may be best to declare a dividends distribution in 2012. Some shareholders that have borrowed from a corporation they have stock ownership in, may have to recognize the borrowings as undistributed dividends at some point in the future. These taxpayers may want to consider voluntarily recognizing dividends in 2012 rather than waiting to be asked by the IRS through an audit.

5. Employees and self-employed taxpayers have been enjoying a 2% temporary reduction in FICA rate. There is a good chance that this tax break will be eliminated. If your wages or net income from self-employment is lower than $110,100 you may want to shift income from 2013 into 2102. You will still be able to take advantage of the lower FICA rate in 2012.

6. If you are planning a Roth IRA conversion you may consider doing the conversion in 2012 to reduce the possibility of higher taxable income and being subject to the 3.8% surtax.

7. Do not overlook “gift-giving” as a tax strategy. For the year 2012 the annual gift tax exclusion is $13,000 per recipient. Married couples can make combined tax-free gifts of $26,000 to each recipient. The lifetime gift tax exclusion for 2012 is $5,120,000 should be considered as a tax strategy because this exclusion amount will drop to $1,000,000 in 2013.

8. In the past the most common tax advice was to shift income to the following year and expenses to the current year. We are going against this wisdom in 2012 and asking certain clients to take more income in 2012 and shift expenses to 2013.

Of course Congress and the President are currently meeting in order to avoid the so called fiscal cliff and some or all of these changes may be on the table. We will continue to watch and keep you apprised of what happens.

We are available to walk you through any concern you may have or to provide you with tax planning tailored to your individual needs.

Contact SVHS

The certified public accountants (CPA) and advisors at Sadd Velazquez Higashi Shammaa are ready to assist you with all of your accounting and consulting needs. Contact us today and we will connect you with the professional you need.

Sadd Velazquez Higashi Shammaa, LLP
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Glendale, CA 91203

Phone: (818) 547-5701
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