2012 YEAR-END TAX PLANNING

Per IRS, from 2001 to 2010, about 4,430 changes were made to the tax code, and in 2010 alone, an estimated 579 changes were made.

Many tax benefits were scheduled to expire at the end of 2012 unless Congress acts to further extend them.  Some of them are listed below:

Individual Income Tax Rates

The lowest individual tax rate will go from 10% to 15% and the highest individual tax rates will go from 35% to 39.6%

Long-Term Capital Gain Rates

The maximum rate will increase from 15% to 20% in 2013. An 18% maximum rate will apply to capital assets purchased after 2000 and held for more than five years.  In addition, higher-income tax payers will pay an additional 3.8% Medicare contribution tax.

Dividend Income Rates

“Qualified dividend income” is dividends received from domestic corporations and certain foreign corporations to be taxed at long-term capital gain rate. Currently in 2012, it is taxed at 15%.  If Congress fails to extend these provisions, it will be taxed as ordinary income.  For taxpayers in the highest tax bracket, the rate will be 43.4% (39.6+3.8%).

New Medicare Contribution Tax

For MFJ with income over $250,000 or unmarried individuals with income over $200,000, there is a new 3.8% Medicare contribution tax on certain unearned income includes interest, dividend, capital gains, passive activity income.

Payroll Tax Break

The employee portion of FICA payroll taxes will increase from 4.2% to 6.2% for everyone.The employee portion of the hospital insurance payroll tax will increase by 0.9% (from 1.45% to 2.35%) on wages over $250,000 for MFS and $200,000 for others due to Obama Care.

Medical and Dental Expense

As part of Obama Care, the threshold for claiming the itemized medical and dental expense deduction is scheduled to increase from 7.5 to 10% of AGI.

Dependent Care expense

Maximum creditable expenses will decrease from $3,000 to $2,400 for one qualifying child and $6,000 to $4,800 for two or more children.

Child Credit

The maximum credit will decrease from $1,000 to $500 per child.

Phaseout of Personal Exemptions

Higher income taxpayers’ personal exemption will be phased out at $261,650 of income for MFJ and $174,450 for others.

Decrease in Standard Deduction for MFJ

The standard deduction for MFJ will reduce from $11,900 to $9,900.

Reduction in Itemized Deductions

There will be an overall limitation on itemized deductions for higher-income tax payers.

Section 179 Depreciation

In 2012, the maximum allowable expense is $139,000 and is reduced to $25,000 in 2013.

2012 Year-End Tax Planning Ideas

• May not want to defer income to 2013
• Contribute more to retirement plan (401K, IRA, profit sharing etc.)
• Plan investment gains and losses
• Invest in tax-exempt bonds
• Increase itemized deductions (bunching medical expenses)
• Give to charity
• Check if withholding/ estimated tax  is enough
• Review estate tax planning (5.12 million gift and estate tax exclusion in 2012)
• Take advantage of Section 179 and get deduction for business assets purchase

** Please consult your tax advisor for details.