CPA Boca Raton
Based on what, if any, tax legislation Congress is able to enact over the following many weeks, we'll likely have a tax increase for 2013 and then years. Having said that, the following are some key strategies that should be considered.
Business Expense Strategies
If you're a cash-basis taxpayer and business owner operating being an S corporation, partnership or sole-proprietorship, you have to pay tax about the business’s net profit on your own individual federal taxes return. The company itself doesn't give the tax. Therefore, an increase in tax rates is going to affect you. Now is the time to plan because of these tax rate hikes. Specifically, pay attention to once you incur deductible business expenses. You may postpone many of these expenses with a future year when tax rates might be higher. On another hand, businesses with carry-forward losses may benefit more by accelerating income (for the extent possible according to tax law) into 2012 and deferring expenses to 2013 or later.
Local and state Tax Payment Strategies
Taxpayers usually have some flexibility in determining when you should make state and local tax payments. Such payments include income tax, real estate and personal property taxes. Most of these items might be deductible for you personally depending on your tax situation. Review your situation to ascertain whether you've got flexibility to delay these payments into next season. The delayed payment, and subsequent boost in tax deductions, may provide greater tax savings next year if tax rates increase.
Timing Charitable Contributions Strategies
When you consider additional 2012 charitable contributions, you need to project toward 2013. It might be advantageous to separate your charitable giving budget between your two years. A charitable deduction (provided that it is not at the mercy of limitation depending on your earnings) might become more valuable in 2013 than in 2012. After a little analysis, you may find it more advantageous to lower your remaining 2012 charitable contributions and allocate more assets (cash or securities) in your 2013 charitable budget. If you decide to wait for 2013 to make charitable gifts, you should look at which makes them with appreciated long-term assets rather than cash. Because of the possibility of rising tax rates, this tactic deserves a second look. Once the method is appropriate, the huge benefits are twofold:
When gifting appreciated stock to charity you avoid incurring capital gains taxes about the stock
Something special to some qualified charity provides a tax deduction, towards the extent it's not limited based on your income.
Be sure to discuss this choice to insure expenditures are fully deductible.
With regards to payments from your employer, consider whether you anticipate receiving a bonus or a one time because of retirement or a job transition, and engage with your employer regarding your flexibility within the timing of getting the payment. Some workers are offered transition payment schedules that stretch over multiple year. This isn't always ideal when tax rates are required to improve as in 2013. Overview of the payment amount, date(s) of receipt and your expected taxes bracket in 2012 and future years will be important in deciding or negotiating when you receive this income.
Regarding IRA or annuity distributions, taxable distributions from IRAs or annuities really are a concern inside a rising-tax-rate environment. If you are needed to take minimum distributions from your retirement plan, IRA or inherited IRA, you’ll desire to factor that into future-tax-year projections. Taking mandatory distributions boosts your taxable income and could require either a boost in your withholding or, perhaps, paying estimated taxes quarterly to avoid an underpayment penalty. If you’re considering taking an elective distribution over the following several years, by taking your distribution this year when income tax rates are lower may be beneficial. This plan is especially timely when it comes to potential distributions and recognition of taxable income as a result of a Roth IRA conversion.
IRA to some Roth IRA Conversion Strategies
Anyone, no matter income, can now convert a regular IRA to a Roth IRA. The great things about converting are the possibility of tax-free income in retirement as well as the ability to give assets that the heirs can withdraw tax-free after your death. However, you may incur income tax in you make the conversion. Because rates are scheduled to increase on January 1, 2013, if you’re considering converting, you may be more satisfied carrying it out this year instead of in 2013.
Accelerating Long-Term Capital Gains Strategies
January 1, 2013, often see get rid of historically low long-term capital gains rates. How much these rates increase depends on your ordinary income tax rate bracket. Various Congressional proposals have been made that included alternative schedules, with some affecting only higher-bracket taxpayers; however, at this stage they remain exactly that - proposals. Because it stands now, it may seem good for sell appreciated securities or assets that you’ve held for a long time next year to consider good thing about this year’s lower capital gains tax rates. This strategy may be particularly appropriate in certain situations: It is possible to make use of the current 0% long-term capital gains rate. If your net taxable income, including your long-term capital gains, is under $70,700 (joint filers) or $35,350 (single filers) in 2012, you will be inside the 10% or 15% ordinary tax bracket, therefore you might be able to realize some tax-free long-term capital gains. In case your capital gains push you over your threshold, or else you have been in a greater income tax bracket, then some or all the gains will probably be taxed in the 15% long-term capital gains rate.
If you hold a concentrated equity position, meaning a substantial position in one stock which includes appreciated with time, selling a percentage from the shares and purchasing other investments using the proceeds can help you diversify and lower the market risk within your portfolio. If you have other goals which entail recognizing the gain, then you need to assess the various ways to help manage the chance of a concentrated position and also the tax liability that could occur upon selling an investment. However, because of the limited window of opportunity for 2012’s historically low long-term capital gains tax rates, you might like to you should consider selling a portion this coming year. Doing this can assist you steer clear of the potential tax rate increase that is scheduled for long-term capital gains recognized in 2013 and thereafter.
If you own real estate or business assets, the upcoming tax rate changes should prompt one to consider the way you are managing those assets. Sometimes, the customer and seller for these assets can structure the sale so that proceeds are paid over several tax year. Typically, this plan helps the owner manage his or her tax liability. However, considering that both ordinary income-tax-rates and long-term capital gains tax rates are scheduled to rise in 2013, you might want to attempt to develop a sale, and receive its proceeds, in 2012. If that is extremely hard, then perhaps electing out of an installment sale treatment and accelerating the wages recognition all to 2012 may be an alternative.
Think ahead before selling if you decide to sell appreciated securities in 2012 to consider advantage of the low long-term capital gains rates, but be strategic in the method that you do it. For that part of your portfolio you've got designated for long-term goals, review and rebalance your allocation so that you will have been in a better investment management position in the years ahead. Doing so will allow you to take advantage of 2012’s lower long-term capital gains tax rates, and in long term you might need less rebalancing, that ought to help reduce increases in size which you realize once the tax rates are higher.
Accelerating Capital Losses Strategies
Typically, investors consider selling investments near year-end to realize losses to offset capital gains or approximately $3,000 in ordinary income. However, for those who have modest unrealized losses in 2012, , nor anticipate generating sizable capital gains, you may consider waiting to understand those losses until 2013.
Offsetting long-term capital gains which are taxed at 20% (the 2013 rate) will give you more tax savings than with all the losses to offset gains taxed at 15% (the 2012 rate). You’ll need to look closely to project any potential capital gains (and don’t ignore long-term capital gains distributions from mutual funds). For investors whose income (including long-term capital gains) is inside the 10% or 15% tax bracket, harvesting losses will not give a tax benefit if it only reduces long-term capital gains. Losses over gains will give you a nominal tax savings at best and may even provide more value if left in the future.
If, on the other hand, you've got substantial capital losses or capital loss carry-forwards, it can be challenging to consume all those losses. In this case, it likely does not seem sensible to postpone offsetting capital gains or waiting to acknowledge gains.
Rebalancing Your Portfolio Strategies
In general, a qualified dividend is but one paid with a U.S. corporation or an international corporation that trades on a U.S. stock market. You may also be given a qualified dividend in the event you hold shares inside a mutual fund that invests during these forms of corporations.
Currently, qualified dividends are taxed with a maximum 15% rate - like long-term capital gains; however, in 2013, they may be scheduled being taxed at ordinary income tax rates, which could be a maximum 39.6% rate (and potentially yet another 3.8% Obamacare surtax on high income taxpayers). Given this anticipated change, you might like to consider reallocating the portion your portfolio locked in taxable accounts using the following strategies.
Think about adding growth-stock holdings. In the event you don’t need current income, you might want to look at the advantages of shifting some of your equity allocation to growth stocks. Or you will reposition a portion of your tax-deferred account allocation to dividend-paying stocks, where the dividends will be shielded from current taxation. Having a dividend-paying stock, your overall return is based on both growth and income, as well as the income portion could be taxed as everyday income from 2013.
If you hold a growth stock in the future, any appreciation within the stock’s price will never be taxed before you sell it. At that time, you'd owe long-term capital gains taxes (if you held the stock more than one year), that can be less than ordinary income rates even with 2012. Because this tactic involves issues surrounding both your long-term asset allocation and taxation, cautious must be done to help determine the proper strategy for your position.
Reassess your tax-exempt bond holdings. If you need income, carefully weigh the advantages and disadvantages of tax-exempt bonds versus dividend-paying stocks. With rising tax rates, tax-exempt income may be more appealing. Dividend-paying stocks risk having their dividend reduced or eliminated altogether. Also, tax-exempt bonds are often less volatile than stocks.
However, tax-exempt investments have inherent risks. For example, bond investments may not be as well equipped to safeguard against inflation as stocks. In addition, keep in mind that some municipal bond interest may trigger the AMT tax. Also, bond prices will fluctuate and move inversely to interest levels. If interest rates increase, your bond investments’ principal value will fall. We recommend continual portfolio monitoring as well as the outlook for that economy as well as the markets, so any proactive changes can be created when needed.
You’ll want to evaluate the investment’s yield. At 2012 income-tax-rates, a tax-exempt bond using a 4% yield would be similar to a taxable investment having a 5.3% yield for somebody in the 25% federal tax bracket. If income-tax-rates increase, this same taxpayer will have to locate a taxable investment having a 5.6% yield to build exactly the same after-tax income since the 4% tax-exempt bond.
If you decide to alter your portfolio’s investment mix, understand that overall asset allocation remains suitable for ignore the goals, time horizon and risk tolerance.
Medicare Tax on Investment Income Strategies
Beginning in 2013, married filing joint taxpayers with incomes over $250,000 and single taxpayers with incomes over $200,000 is going to be subject to a new (Obamacare) Medicare tax. If you’re in both group, one more 3.8% tax is going to be applied to some or all your investment income, including capital gains. This is along with ordinary and capital gains taxes that you simply already pay!
Exercise Employer-Granted Investment
In case your company grants you commodity in the compensation package, you could have either (or both) nonqualified stock options (NSOs) or incentive stock options (ISOs). You will need to understand the choices you've got and the tax consequences of exercising each type of stock option. NSOs give you the substitute for exercise the options sometime involving the vesting date and the expiration date. (See your stock option plan document or maybe your employee benefits representative unless you know these dates.) Once you exercise an NSO, the real difference between your stock’s fair market price as well as the exercise price will be taxable compensation that’s reported on your W-2. When you have vested options and the chance to exercise them this year or 2013, you’ll must determine in which year it might be more advantageous to exercise your options and recognize the wages. You may want to project your taxable income for 2012 along with a later year and then decide after which it might be less taxing to exercise your options and realize the extra income. You’ll also want to look at the stock’s market outlook, its valuation as well as the options’ expiration date, in your decision-making process.
ISOs are somewhat more complex since your holding period determines whether the exercise proceeds are taxed as everyday income (much like NSOs) or long-term capital gains. To benefit from the potential long-term capital gains tax treatment (having its 15% top rate in 2012 and 20% top rate in 2013) versus ordinary income-tax-rates (which range as much as 35% in 2012 and 39.6% in 2013), you need to support the stock you get multiple year from the exercise date and most a couple of years in the grant date. Because with the holding period requirement, it’s obviously too far gone to secure the 15% capital gains tax rate on options you have not yet exercised. However, should you exercised options this year or earlier yet still contain the shares, you’ll wish to weigh the pros and cons of selling them and recognizing gains next year versus retirement years.
You should also be aware that should you exercise and hold shares from the ISO exercise, the taxable spread (the difference involving the stock price on the exercise date along with your option cost) will probably be taxable income for AMT purposes around when the exercise occurs.
If you exercise your ISOs then sell without meeting this holding period, you may recognize taxable W-2 compensation similar to NSOs. Because of the lower capital gains rates, you may find it more appealing to hold ISO shares rather than selling them right after your exercise. Just make sure to consider any ATM tax potential.
If, instead, you choose to exercise ISOs and then sell the stock, you might want to consider selling by year-end to consider advantage of 2012’s lower ordinary income-tax-rates. Much like NSOs, you’ll wish to industry outlook for that stock, within your decision-making process.
CPA Boca Raton
Anthony Caruso, CPA has practiced being a certified public accountant and investment advisor for over Thirty years. Caruso and Company, P.A. is a Registered Investment Advisor offering paid management of their money, tax and financial planning. Information contained above just isn't supposed to have been a recommendation to purchase or sell any sort of investments, or take specific tax actions and people should check with their advisors for appropriate advice concerning their individual circumstances.