2012 Tax Planning Strategies

With April 17 behind us, it's a good time to start thinking about 2012 tax planning.  We are in a season of uncertainty similar to the dynamics we found in 2010.  At the end of last year, the growing list of expiring tax provisions grew again.  And in 2012, there are more.  Unless Congress acts, the current tax system (historically low rates) will expire and we will see sweeping changes and increased tax rates across the board.  We don't expect that Congress will act before the elections in November, and a "patch" may not be so easy to predict this time.  With the economy on a slow mend, the candidates are both positioning themselves politically, which may not be in the best interest of the common taxpayer.

We believe it would be wise to consider what to do should the current tax system expire and not be extended.  Given Congress' propensity for late-year decisions on these matters, especially during a presidential election year, preparing contingency plans should not be considered foolish.  There may be little time left to execute any plans in late 2012, let alone just starting to plan. 

There are also some new concerns that were not faced in 2010.  In 2013, unless stopped by the Supreme Court, some further tax provisions of the health care legislation are scheduled to take effect, most notably the increased Medicare taxes of .9% of earned income, and 3.8% on net investment income for those with adjusted gross incomes over $250,000 (MFJ).  So what are some of the strategies folks should be thinking about?

ROTH CONVERSIONS - With 2012 being perhaps the lowest tax rates we will see in awhile, Roth Conversions need to be on the agenda for discussion.  This conversion in 2012 would ensure taxation at 2012 rates and make future accumulations tax-free - assuming, of course, that Congress doesn't change those rules as part of a future deficit reduction initiative.

REALIZING CAPITAL GAINS - Current capital gains rates of 15% will rise to 20% in 2013 under current law.  Some may want to wait until after the elections to get a better sense of which way the political winds are blowing before deciding whether capital gains are more likely to rise or fall.

INVESTING IN TAX-EXEMPT BONDS - One option to discuss as a way to avoid the increased Medicare taxes on investment income is to shift more of your portfolio to tax-exempt bonds.  Tax-exempt bonds generally offer lower returns, and you need to be careful to not get too lop-sided when considering diversity.  But it is certainly one way to avoid increased taxes on investments.

GIFTING TO CHILDREN - The current unified gift and estate tax exclusion of $5 miollion will revert to $1 million in 2013 under current law.  The maximum top rate will go from 35% to 55%.  Most people are not willing to accelerate their own deaths (lol !!), so gifting may be a good alternative to take advantage of the current high exclusion amounts.

ACCELERATING AND DEFERRING - Normally, we suggest the opposite.  However, one should consider this year to accelerate income to get taxes at lower rates in 2012, and postpone deductions so they can offset income in 2013 that would otherwise be taxes at higher rates.

REQUIRED MINIMUM DISTRIBUTIONS - One of the provisions that expired at the end of 2011 was the provision permitting taxpayers over 70 1/2 to make IRA distributions directly to a charity and avoid taking those distributions into income.  Although this provision has expired, some may wish to postpone RMD's to see what happens after the election, in the chance this provision may be brought back. 


In summary, like 2010, 2012 is filled with tax uncertainty.  There are many, many way the tax gods may choose to go.  Try to avoid being so overwhelmed that you ignore what's going on.  Be armed with the facts so you may pull the trigger if you choose to.  And don't procrastinate.  Call if you have any questions or wish to make a time to discuss your options.  That's why we are here.

Once again, we are always available to discuss your specific situation. For more information, please contact us.