Taxing decisions: Uncertainty over fiscal cliff may spur some to adjust financial plans
BY LAURIE WINSLOW World Staff Writer
Sunday, December 09, 2012
12/09/12 at 3:20 AM
Related Story: 10 tax tips for 2012
Tick tock. Tick tock.
Time is running out for 2012, which is hardly a merry thought for those who are behind in their holiday preparations, much less their tax planning.
Year-end tax planning is more taxing because so much uncertainty surrounds what will become of the impending "fiscal cliff" - a combination of expiring Bush-era tax cuts and government spending cuts that become effective at the end of December if Congress doesn't act.
Observers have speculated that if this combination of events takes place, it could have a detrimental effect on the economy.
If nothing is done, ordinary tax rates will increase, qualified stock dividends will be taxed at ordinary tax rates and long-term capital gains will be taxed at a higher rate next year.
Simply put, income taxes are set to go up for all Americans by Jan. 1, 2013.
With everything that is up in the air, it's hard to pinpoint what's important from a tax-planning perspective, accountants say.
"The important thing is you've got to have a plan and stick to that plan," said Jeffrey Frable, a certified public accountant and partner with Curzon Cumbey & Kunkel PLLC. "All these tax implications and threats and rumors, they really shouldn't be what's directing your action."
A change in the capital gains rate is one of the biggest changes looming. Currently, the long-term capital gains tax rate is 15 percent for most taxpayers, but that increases to 20 percent next year. Long-term capital gains refers to assets such as stocks, bonds and property held more than one year.
For those in the lowest tax brackets, the long-term capital gains tax rate rises from 0 percent to 10 percent next year.
"If you think the rates are going up and you have some assets that are liquid such as stocks or mutual funds, you could go ahead and sell those to take advantage of the currently historically low capital gains rates," said Paul Muret of Muret CPA PLLC.
Frable cautions, however, against making dramatic moves before year end just because capital gains could be taxed at a higher rate next year.
Taxpayers hear all this news about how capital gains rates are going to go up next year and automatically think they need to start dumping stock or selling business interest to take advantage of the better rate this year, but that isn't necessarily the case, Frable said.
"If you're not ready to do it and it's not part of your big-picture plan, you need to get over the fear and the comments that are out there time and time again. ... This fiscal cliff could really scare people into doing some things they don't want to do," Frable said.
Among other changes in store: Tax brackets are set to rise next year. For 2012, the tax brackets are 10 percent, 15 percent, 25 percent, 28 percent, 33 percent and 35 percent. Next year, those rates will go up respectively to 15 percent, 28 percent, 31 percent, 36 percent and 39.6 percent.
In some cases, it may make sense for some taxpayers to accelerate income into 2012 to take advantage of the lower tax rates if they expect to be in a higher tax bracket next year. For example, self-employed people who report income and expenses on a cash basis can issue bills and try to collect on them. Some clients might be willing to pay for January 2013 goods or services in advance, said Steve Milam, a certified public accountant with Milam & Associates PLLC.
"Note, however, that accelerating income into 2012 will be disadvantageous if you expect to be in the same or lower tax bracket for 2013," Milam said.
However, those who expect their adjusted gross income to be higher this year than next might benefit from deferring income into next year. This can be done by delaying billing so that payments aren't received until 2013 or deferring interest income earned on Treasury securities and bank certificates of deposit.
"To defer interest income, consider buying short-term bonds or certificates that will not mature until next year. If you have control as to when dividends are paid, arrange to have them paid to you after the end of the year," Milam said.
Another big change involves the Alternative Minimum Tax (AMT), which originally was designed years ago to target wealthy people who try to reduce their tax burden by using certain tax breaks.
Millions more taxpayers could find themselves subject to this complex and confusing tax this year.
Because AMT isn't indexed like the standard deduction is for regular taxpayers, it has affected more middle-class Americans over time. Personal tax exemptions are all indexed to the consumer price index and go up a little bit every year, but AMT wasn't indexed when it was originally put in place.
And $100,000 today isn't as much as it was when the tax was first put in place.
"AMT is one of the most confusing elements of the tax law because it's hitting so many middle-class taxpayers," Frable said. "It's something that used to affect the rich. Because the tax rates have shrunk and the way AMT is calculated, it's affecting more and more middle-class."
Taxpayers who fall into the AMT category aren't eligible for certain deductions or credits.
For several years, Congress has tried to patch the problem by temporarily raising the amount that taxpayers can exempt from AMT. That patch expired this year, making exemption amounts for 2012 lower than they were last year.
The 2012 AMT exemption amounts are $45,000 for married individuals filing jointly and for surviving spouses, $33,750 for unmarried individuals other than surviving spouses and $22,500 for married individuals filing a separate return.
"If Congress does not address the AMT tax framework, millions more taxpayers will be subject to a tax that they had not had to address in the past," Milam said.
He noted that AMT is involved and how taxpayers plan for it is almost the opposite of how they would plan for regular taxes. Milam advises individuals get with a CPA to find out how they may be affected.
March 15, 2013: Corporate income tax returns due.
April 15, 2013: Tax returns due for individuals, partnerships and trusts. Also, the last day to make a 2012 IRA contribution and to request a tax filing extension. First-quarter 2013 estimated taxes also are due from those who are self-employed or have other first-quarter income that requires paying quarterly estimated taxes.
June 17, 2013: Second-quarter estimated taxes due.
Sept. 16, 2013: Extension due date for all business returns, including corporations, S-corporations and partnerships. Also, third-quarter estimated tax payment due.
Oct. 15, 2013: Extension date for individuals.
Jan. 15, 2014: Fourth-quarter 2013 estimated taxes due.
Original Print Headline: Taxing decisions
Laurie Winslow 918-581-8466