It is that time of year again! Time to put up the holiday displays, be merry, spend money, and get ready for tax season! A lot of people don’t want to think about it, but (if you plan properly) the happiest time of the year is just around the corner. The actions you take in these final months of 2012 can have a big effect on your taxes. This advisory will identify some key strategies that should be implemented prior to the end of the year to effectively limit your tax liability.
As with any other tax year, the more taxable income your company earns in 2012, the more taxes you and your company will pay. Therefore, it is logical to defer any ordinary income you can until next year. This is especially true if you or your business will be in a lower tax bracket this year as a result of your tax planning.
For business tax planning, send out monthly billing later in the month of December. Because it takes, on average, 25 days to receive payment, any payments received after January 1, 2013 are credited and recognized as income in 2013, provided your business is on the cash method of accounting.
For individuals, if you are to receive a bonus, defer it until next year. (BE CAREFUL – if you have a retirement plan that is based on a percentage of your gross pay for the year, you do not want to reduce your retirement contribution because of your deferred bonus.) Finally, you may decide to defer income using more traditional means, by participating in a deferred compensation plan, buying tax deferred treasury securities, or some specific certificates of deposit that allow for deferral of interest income.
We all hate paying bills, but now is the best time to pay them. Even if you wait to pay a given bill on December 31, you can still deduct the payment in 2012. For business tax planning, buy supplies in December and stock up for the next few months. In addition, the IRS will allow you to deduct the expense if you have charged the item and not yet paid for it as long as you are on the accrual method of reporting. For example, use your company credit card to purchase supplies for January, deduct the expense now, and pay the bill in January.
Individuals, remember to recognize any capital losses that you may have before year end. You are allowed to offset capital gains each year with any losses you incurred, and if the loss isn’t fully utilized this year, it can be carried forward to offset future gains to the extent of $3,000 per year. Pay your investment expenses early, including any mortgage interest, real estate taxes, and any state and local taxes.
Beefing up Section 179 Deductions
Section 179 is an advanced form of depreciation. In 2012, the maximum Section 179 deduction is $139,000. Investing now allows you to utilize this valuable enhanced deduction. In 2013, the deduction drops to $25,000. Don’t wait; purchase equipment and have it delivered before the end of the year.
On January 2012, the bonus depreciation became limited to 50% of the qualifying, original use property. On January 1, 2013, Bonus depreciation once again disappears just as it has in the past. We do not foresee Congress reissuing bonus depreciation for at least a few years. It is therefore recommended that for those that are interested in utilizing bonus depreciation, attempt to utilize the deduction sooner rather than after the New Year.
Capital Gains and Dividends
While Congress and The President have had all year regarding how to face the sunset provisions on capital gains and dividend tax rates, they have chosen to push the issue off to early in 2013. On January 1, 2013, the dividend and capital gains tax rates are slated to go up substantially. Very likely, this issue will not escape the federal government. For the taxpayer with large capital gains and large retained earnings accounts, it is worth a second look as to how to take the capital gains / dividends now as opposed to risking increased amounts in 2013.
By utilizing these year-end tax strategies, you can reduce your tax liability for the year. Lowering taxable income by deferring income, accelerating deductions, giving to charity, and utilizing tax credits, results in lower tax liability. These methods work not only this year, but also year-to-year.
The Center routinely examines tax situations and engages in tax planning, business succession, and estate planning. If you are considering beginning estate planning, keep in mind that you have until December 31 to take advantage of 2012’s gift exemption of $13,000. If you wait until 2013, you will forfeit the opportunity to take advantage of the 2012 gift exemption amount! If you need assistance, contact the professionals at The Center.
By: Dr. Bart Basi at the Center for Financial, Legal and Tax Planning for Transworld M&A Advisors