Year-end planning is a bigger challenge this year than in past years because, unless Congress acts, tax rates will increase next year, many more individuals will be snared by the alternative minimum tax (AMT), and various deductions and other tax breaks will be unavailable. To be more specific, as a result of expiring Bush-era tax cuts, individuals will face higher tax rates next year on their income, including capital gains and dividends, and estate tax rates will be higher as well. The AMT problem arises because, for 2012, AMT exemptions have dropped and fewer personal credits can be used to offset the AMT. Additionally, a number of tax provisions expired at the end of 2011 or will expire at the end of 2012.
- Rules that expired at the end of 2011 include, for example, the research credit for businesses, the election to take an itemized deduction for State and local general sales taxes instead of the itemized deduction permitted for State and local income taxes, and the above-the-line deduction for qualified tuition expenses.
- Rules that will expire at the end of this year include generous bonus depreciation allowances and expensing allowances for business, and expanded tax credits for higher education costs.
These adverse tax consequences are by no means a certainty. Congress could extend the Bush-era tax cuts for some or all taxpayers, retroactively “patch” the AMT for 2012 to increase exemptions and availability of credits, revive some favorable tax rules that have expired, and extend those that are slated to expire at the end of this year. Which actions Congress will take remains to seen and may well depend on the outcome of the elections. While these uncertainties make year-end tax planning more challenging than in prior years, they should not be an excuse for inaction. Indeed, the prospect of higher taxes next year makes it even more important to engage in year-end planning this year. To that end, we have compiled a checklist of actions that can help you save tax dollars if you act before year-end. Many of these moves may benefit you regardless of what Congress does on the major tax questions of the day. Not all actions will apply in your particular situation, but you will likely benefit from many of them.
We can meet with you to narrow down the specific actions that are best for you. In the meantime, please review the following list and contact us at your earliest convenience so that we can advise you on which tax-saving moves to make.
Year-End Moves for Business Owners
- If your business is incorporated, consider taking money out of the business by way of a stock redemption if you are in the position to do so. The buy-back of the stock may yield long-term capital gain or a dividend, depending on a variety of factors. But either way, you'll be taxed at a maximum rate of only 15% if you act this year. If you wait until next year to make your move, your long-term gains or dividends may be taxed at a higher rate if reform plans are instituted or the Bush-era tax cuts expire. And if your adjusted gross income (as specially modified) exceeds certain limits ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 for all others), gains taken next year (along with other types of unearned income, such as dividends and interest) will be exposed to an extra 3.8% tax (the so-called “unearned income Medicare contribution tax”). Keep in mind that you will need expert help to plan and execute an effective pre-2013 corporate distribution.
- If you are thinking of adding to payroll, consider hiring a qualifying veteran before year-end to qualify for a work opportunity tax credit (WOTC). Under current law, the WOTC for qualifying veterans won't be available for post-2012 hires. The WOTC for hiring veterans ranges from $2,400 to $9,600, depending on a variety of factors (such as the veteran's period of unemployment and whether he or she has a service-connected disability).
- Put new business equipment and machinery in service before year-end to qualify for the 50% bonus first-year depreciation allowance. Unless Congress acts, this bonus depreciation allowance generally won't be available for property placed in service after 2012. (Certain specialized assets may, however, be placed in service in 2013.)
- Make expenses qualifying for the business property expensing option. The maximum amount you can expense for a tax year beginning in 2012 is $139,000 of the cost of qualifying property placed in service for that tax year. The $139,000 amount is reduced by the amount by which the cost of qualifying property placed in service during 2012 exceeds $560,000 (the investment ceiling). For tax years beginning in 2013, unless Congress makes a change, the expensing limit will be $25,000 and the investment ceiling will be $200,000. Thus, if you anticipate needing property in early 2013, you may want to push the purchase into 2012 to gain a higher expensing deduction (if you are otherwise eligible to claim it). The time of purchase doesn't affect the amount of the expensing deduction. You can purchase property late in the year and still get a full expensing deduction. Thus, property acquired and placed in service in the last days of 2012, rather than at the beginning of 2013, can result in a full expense deduction for 2012.
- If you are in the market for a business car, and your taste runs to large, heavy SUVs (those built on a truck chassis and rated at more than 6,000 pounds gross (loaded) vehicle weight), consider buying in 2012. Due to a combination of favorable depreciation and expensing rules, you may be able to write off most of the cost of the heavy SUV this year. Next year, the write-off rules may not be as generous.
- Set up a self-employed retirement plan if you are self-employed and haven't done so yet.
- Increase your basis in a partnership or S corporation if doing so will enable you to deduct a loss from it for this year. A partner's share of partnership losses is deductible only to the extent of his partnership basis as of the end of the partnership year in which the loss occurs. An S corporation shareholder can deduct his pro rata share of an S corporation's losses only to the extent of the total of his basis in (a) his S corporation stock, and (b) debt owed to him by the S corporation.
Have questions about which year-end steps you should take? Post a comment below or contact our Cleveland, Akron and Tampa Tax Planning & Preparation Group at 440-449-6800.