Year-End Tax Tips

With so many tax laws up in the air, year-end tax planning is more challenging than ever this year. Changes to the tax code are on the horizon, and almost all taxpayers will be affected if the Bush-era tax deductions and credits are allowed to expire. But let’s not forget that many of the tax changes proposed by President Obama will benefit the majority of taxpayers.

Amid the uncertainty, we can be sure of a couple of things:

• The fiscal cliff, the national debt ceiling and tax issues are all intertwined. Watching developments in the news will help you and your tax advisor develop a tax strategy for the next few months.
• Changes are coming. It is essential that taxpayers sit down with their professional tax advisors to determine what anticipatory planning and actions to take before this year ends. Getting ready now means you will be prepared when tax policy changes are announced. Furthermore, you will be in a position to take full advantage of new policies.
• Nothing is certain (at the time this is being written). Some Bush-era tax breaks might be extended; however, estate and gift tax rates are expected to be higher, and an additional 27 million taxpayers could get caught up in the Alternative Minimum Tax loophole if the patch is not extended. Other credits considered to be endangered include deductions for state and local sales taxes, mortgage insurance premiums, college tuition and fees, as well as changes to the student loan interest deduction and the expiration of the American Opportunity Credit for Students.

Here are some actions to ponder before year’s end. All these ideas should be discussed with your professional tax advisor before you take action.

• Consider transferring a business or cashing out certain investment holdings to record as much future income as possible on this year’s balance sheet. Wealthy investors are planning payouts timed to take advantage of current dividend rates and selling stock and businesses.
• Consider making year-end charitable donations of appreciated stock (rather than cash). This allows a taxpayer to avoid paying tax on the appreciation value but to still deduct the full value of the charitable gift on the 2012 return. 
• List all the major life changes that occurred in 2012 that might affect your tax return. This list might include a spouse retiring, job hunting, volunteer work, buying/selling a home, etc. Gather all your tax documents, charity receipts and a copy of last year’s return.
• Gather all your charitable contribution documentation.  If you can’t support the charitable donations you claim, you might lose them. If they are under $250, make sure you have a bank record that supports the donation (e.g. a canceled check) or a written statement from the charity that meets the tax law requirements. If the donation exceeds $250, you’ll need a statement from the charitable organization showing the amount donated plus a statement that indicates that no goods or services were provided in return for the donation.
• Leverage the 15 percent capital gains rate before it’s gone. With capital gains tax rates expected to increase to 20 percent from 15 percent, and with an additional 3.8 percent Medicare contribution tax on net investment income possible for some high income taxpayers in 2013, it makes sense for some taxpayers to sell assets (stocks or vacation homes) owned for more than one year before year’s end.

Perhaps no tax season in recent memory has been fraught with so many uncertainties – expiring tax laws, tax policy changes and possible last-minute legislative action. With this in mind, get a handle on as much as you can right now. Gather information and sit down as soon as possible with your tax planner. It’s going to take extra care to make sure you leave no money on the table for Uncle Sam in 2013.

These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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