Given the tax changes ready to take effect, it is imperative that 2013 tax planning be implemented as soon as possible. There is no better time to discuss potential tax savings than when you meet with your tax advisor to review 2012 tax information.
It is that time of year again, the dreaded time, when you gather all of your tax documents and have that annual meeting with your tax advisor to discuss what happened during 2012 so that they can prepare your income tax returns.
However, 2013 is different, due to the fact that income taxes will be increasing significantly. The American Taxpayer Relief Act of 2012 (ARTA) is estimated to raise an additional $600 billion in tax revenue over the next 10 years. The $600 billion does not include additional tax revenue from the Patient Protection and Affordable Care Act of 2010 (ACA) scheduled to take effect in 2013.
As a result, it is imperative that 2013 tax planning be implemented as soon as possible and there is no time better to discuss potential tax savings for 2013 than when you are meeting with your tax advisor to review 2012 tax information.
Below we will discuss some of the highlights of ARTA and ACA followed with five tax tips that you can discuss with your tax advisor now, so that they may assist in reducing your 2013 tax liability.
Increased tax rate for higher earners
The Bush tax cuts will remain permanently in effect for all individuals making less than $400,000, and couples earning less than $450,000 taxable income. The remaining individuals will be taxed at 39.6% for all income earned above the previously mentioned thresholds, up from the Bush era maximum rate of 35%.
All income up to the $400,000/$450,000 thresholds will be subject to the 10%, 15%, 25%, 28%, 33% and 35% tax rates, which were the rates under President George W. Bush. Only the taxable income over the thresholds will be taxed at the new higher rate.
Qualified dividends and capital gain tax rates
Tax rates for capital gains will increase to 20% (from 15%) for those taxpayers with taxable income in excess of the previously mentioned thresholds ($400,000 single/$450,000 couples), otherwise the rate will remain at 15% for all other taxpayers (0% tax rate for those individuals who are below the top of the 15% tax bracket).
Qualified dividends will continue to be taxed at the applicable capital gain rates.
Medicare tax on investment income
A Medicare tax of 3.8% will be imposed on individuals, estates and trusts. For individuals the tax is imposed on the lesser of the individual’s net investment income for the year or the amount of the individual’s modified adjusted gross income that exceeds a threshold amount.
For estates and trusts, the tax is imposed on the lesser of undistributed net investment income or adjusted gross income over the $11,950. For married individuals filing a joint return and surviving spouses, the threshold amount is $250,000; for married taxpayers filing separate returns, the threshold is $125,000; for all other taxpayers the threshold is $200,000.
Net investment income means investment income reduced by deductions properly allocable to that income. Investment income includes income from interest, dividends, annuities, royalties and rents, and gain from the disposition of property, other than such income derived in the ordinary course of a trade or business.
The following five tips should be explored with your tax advisor now to help reduce your tax liability in 2013.
Consideration should be given to maximizing contributions to retirement savings vehicles, such as 401(k) plans, Keoghs plans or SEP IRAs. For businesses, it may make sense to capitalize on establishing a profit-sharing retirement account. Maximizing contributions to retirement vehicles will reduce your overall taxable income that may be subject to the higher marginal tax rates.
Consider rebalancing your investment portfolio by increasing investments in growth assets and decreasing emphasis on dividend-paying assets. In addition, with the higher tax rates, tax-exempt investments may produce a greater yield than taxable investments.
By rebalancing your portfolio, you may be able to reduce and better control potential income, which may be subject to higher capital gain rates as well as the 3.8% Medicare tax.
Consider donating appreciated securities, rather than cash, to charity to receive a charitable deduction equal to the fair market value of the securities. The appreciation on the security will not be subject capital gains tax and will also avoid the 3.8% Medicare tax.
Consider making gifts of appreciated securities to your children (limited benefit based on age of children and the so called Kiddie tax rules). This could help shelter the appreciation on the securities to lower capital gain tax rate as well as sheltering it from the 3.8% Medicare tax.
Limited Liability Companies may consider converting to an S-Corporation. Active shareholders of an S-Corporation will not be subject to the 3.8% Medicare tax on either distributed or undistributed income passing through to them from the S-Corporation.
Sooner rather than later
The tax tips discussed above should be discussed with your tax and financial advisors as soon as possible. Waiting to discuss these tips with your advisors could have adverse tax consequences for 2013, which may grow with the postponement of such discussion.
John Teixeira, CPA, MST is a tax manager with Sansiveri, Kimball & Co. LLP. Located in Providence, R.I., Sansiveri, Kimball & Co. LLP, is a leading provider of accounting, tax and consulting services to the medical community. For more information about Sansiveri, Kimball & Co. L.L.P., or the topic discussed in this article, John can be reached at firstname.lastname@example.org.Sansiveri, Kimball & Co. L.L.P. is also a proud member of the National CPA Health Care Advisors Association. HCAA is a nationwide network of CPA firms devoted to serving the healthcare industry. Members provide proactive solutions to the accounting needs of physicians and physician groups. For more information contact the HCAA at email@example.com.