Tax Moves You Must Make Before the End of the Year (Accounting Today)

Taxes Going Up- Obama Victory means you need to act now

November 12, 2012

By Margaret Collins

(Bloomberg) The race is on for wealthy Americans to save on taxes before January 1.

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President Barack Obama’s re-election means his administration will push to let tax cuts enacted during the George W. Bush era expire for high earners, as scheduled, at year-end. Obama wants to increase the top federal income tax rate to 39.6 percent from 35 percent, boost rates on long-term capital gains to as much as 23.8 percent, and shrink exemptions from estate-and-gift taxes.
“If you have to put a movie title on what’s going to happen from now until the end of the year it would be: ‘The Fast and the Furious,’” said Jeff Saccacio, a personal financial services partner at New York-based PricewaterhouseCoopers LLP. “The wise, smart people are preparing themselves for a sunset of the Bush tax cuts.”

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Wealthy investors have about a month and a half to examine their investment gains and losses left over from previous years, as well as to consider ways to move income into 2012 and transfer assets to heirs, Saccacio said. Now is the time to start running the calculations, he said.
“Acceleration of investment income is clear,” said Elda Di Re, partner and personal financial services area leader for Ernst & Young LLP in New York. “If anyone was planning on realizing a gain in the next two to three years on either securities or real estate, there’s a considerable amount of money to be saved.”
The Standard & Poor’s 500 Index, which is up 64 percent since Obama took office in 2009, lost 2.4 percent yesterday to 1,394.53, its lowest level since August.
Capital Gains
An investor who sells $100 of stock with a cost basis of $20 in 2012 would see proceeds—after capital gains taxes—of $88, according to an analysis by J.P. Morgan Private Bank. Next year, if Congress doesn’t act, earnings from the sale would drop to $80.96 if rates rise to 23.8 percent. That means the stock price would need to rise by at least 9 percent for an investor to be better off selling in 2013.
Investors shouldn’t accelerate sales of securities just to avoid a higher tax rate, said Saccacio, who is based in Los Angeles. They should consider how long they planned to hold stocks and whether they need to rebalance. Those who decide to sell at current capital gains rates can re-invest in the securities if they remain attractive without violating so-called wash-sale rules under the Internal Revenue Service code that apply to stocks sold at a loss, he said.
Bonuses, Dividends
Closely held businesses that have a choice to pay bonuses or dividends in 2012 or 2013 should do so before year-end, said Joanne E. Johnson, wealth adviser and managing director at New York-based JPMorgan Chase & Co.’s private bank unit. The tax rate on dividends may jump to as much as 43.4 percent next year from 15 percent now with the expiration of Bush-era tax cuts and levies set to take effect from the health-care law.
Employees who have a choice to receive their bonus this year should do so and consider exercising stock options that are set to expire, she said.
While the election provided some clarity, wealthy taxpayers still must be prepared for the unexpected before Dec. 31, Johnson said. “We don’t know what the compromises are going to be,” she said.
Fiscal Cliff
Democrats maintained control of the U.S. Senate in the election results last week as Republicans kept their majority in the House of Representatives. That ensures continued resistance to Obama’s determination to raise taxes for the wealthiest Americans in the effort to reduce the U.S. budget deficit.
Lawmakers may have to address the so-called fiscal cliff of tax increases and spending cuts that would start in January if Congress doesn’t act in a lame-duck session set to begin this month.
House Speaker John Boehner told reporters last week that Republicans are “willing to accept new revenue under the right conditions.” He cited ideas Democrats already have rejected: restructuring entitlement programs and relying on revenue generated by economic growth from a tax-code overhaul.
Some tax-rate increases scheduled to take effect next year don’t depend on fiscal-cliff negotiations, said Di Re of Ernst & Young. The 2010 health-care law, which Republican presidential candidate Mitt Romney had vowed to repeal, applies a 3.8 percent surtax on unearned income such as realized capital gains, dividends and interest in 2013 for married couples making more than $250,000 and individuals earning at least $200,000.
Payroll TaxThe law also increases the Medicare payroll tax levied on wages by 0.9 percentage points for high earners.
Wealthy taxpayers with large carryover losses remaining from 2008 and 2009 may not want to rush to sell securities before year-end, Saccacio said. They may have enough losses to offset future gains even with higher tax rates, he said.
When capital losses exceed gains, the extra generally can be deducted on individuals’ tax returns and used to reduce other income, such as wages, up to an annual limit of $3,000, according to the IRS. If the total loss is more than the cap, the unused portion may be carried over to following years.
The Obama victory also may lead some millionaires who were hesitating to take advantage of current rules on gifts to fund trusts they’ve set up, said Linda Beerman, manager of the wealth strategies group at Atlantic Trust. The firm is the private wealth-management unit of Atlanta-based Invesco Ltd.
Estate Tax
Legislation enacted in 2010 raised the lifetime estate-and- gift-tax exclusion for 2011 and 2012. This year individuals can transfer up to $5.12 million—or $10.24 million for married couples—free of estate and gift taxes. Those levels are scheduled to expire at the end of 2012 and Obama wants to set the estate tax threshold at $3.5 million while dropping the gift-tax exemption to $1 million as it was in 2009.
“People are really rushing here at the end to take advantage of it,” Beerman said.
Wealthy families should consider setting up trusts under current rules that can benefit grandchildren or future generations and set them up in states such as Delaware, which let the entities exist in perpetuity, said Johnson of JPMorgan. The Obama administration has proposed curtailing the benefits of such trusts as well as limiting discounts taken when transferring illiquid assets in its most recent budget proposal.
Decisions about making charitable contributions this year are more complicated, Beerman said. While deductions for donations probably will be more valuable next year if rates are higher, limits on itemized deductions for those with higher incomes are scheduled to be reinstated next year, she said.
“They need to start crunching some numbers,” PwC’s Saccacio said of wealthy taxpayers. “This year, year-end tax planning takes on a heightened significance given the fact that we’re going to have this jump in rates next year unless we have an 11th-hour adjustment.”

Mileage Rates for Tax Deductible Business, Charity, Medical, Moving Expenses (IRS.gov)

IRS Announces 2012 Standard Mileage Rates

WASHINGTON — The Internal Revenue Service today issued the 2012 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.
Beginning on Jan. 1, 2012, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:
• 55.5 cents per mile for business miles driven
• 23 cents per mile driven for medical or moving purposes
• 14 cents per mile driven in service of charitable organizations
The rate for business miles driven is unchanged from the mid-year adjustment that became effective on July 1, 2011. The medical and moving rate has been reduced by 0.5 cents per mile.

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs as determined by the same study. Independent contractor Runzheimer International conducted the study.

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.
A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for more than four vehicles used simultaneously.
These and other requirements for a taxpayer to use a standard mileage rate to calculate the amount of a deductible business, moving, medical or charitable expense are in Rev. Proc. 2010-51.

Notice 2012-01 contains the standard mileage rates, the amount a taxpayer must use in calculating reductions to basis for depreciation taken under the business standard mileage rate, and the maximum standard automobile cost that a taxpayer may use in computing the allowance under a fixed and variable rate plan.

The New Estate Tax (Forbes)

Money & Investing
Rewrite Your Will
Janet Novack and Ashlea Ebeling 01.17.11, 6:00 PM ET


Over the pained howls of liberals, Congress has increased the exemption from the federal estate tax to $5 million, leaving fewer than 4,000 families likely to be stuck paying the 35% tax in 2011. While the new estate deal expires at the end of 2012, the $5 million figure is unlikely to fall. "Rates can fluctuate, but estate tax exemptions don't get reduced," says Columbia Law School professor Michael J. Graetz, who coauthored a book on the political battle over taxing inherited wealth.

That hefty $5 million exemption, combined with a new portability provision, should allow many affluent couples to simplify their planning, leaving their assets outright to each other instead of to cumbersome bypass trusts. Portability? If a married person dies in 2011 or 2012 without using up his full $5 million exemption (amounts left to charity or a U.S. citizen spouse are estate tax free and don't count against that exemption), the unused exemption is passed to the surviving spouse. That allows a widow or widower to leave as much as $10 million free of estate tax. (No, before you entertain lurid ideas, you can't stockpile multiple spousal exemptions through serial marriages. Only what is left of your last late spouse's exemption counts.) Here's a look at what you need to know and do in 2011.

Don't ignore the basics

Whatever your age, marital status or net worth, you need a will (saying who gets your stuff); a living will (stating your wishes about end-of-life care); a health care proxy (naming someone to make medical decisions for you if you can't); and a durable power of attorney (designating someone to act on your behalf in financial and legal matters if you can't). If your situation is very simple and you are cheap, using do-it-yourself software is better than nothing. (More than half of Americans lack wills.) If you have minor or disabled children, or substantial assets, or live in a state with its own version of an estate tax, spring for a lawyer.

Review any old estate plans

"People are going to have to undo a lot of the planning that's been done,'' warns Bernard Kent, a lawyer, CPA and managing director of Telemus Capital Partners in Southfield, Mich. Example: Many couples have old wills designed mainly to preserve the estate tax exemption of the first spouse to die, something the law now does. Under these old "formula" wills, when the first spouse dies assets equal to his or her federal estate exemption go into a "bypass trust" for their kids. The surviving spouse has access to the trust's earnings and, if need be, principal, but what's in the trust "bypasses" the survivor's estate. Problem is, with the exemption jumping to $5 million (it was only $2 million in 2008) the survivor could be left with nothing outside the trust. Moreover, individual retirement accounts, primary residences and other assets that shouldn't be in the trust for income tax reasons could be automatically sucked in, warns Portland, Ore. estate lawyer Marsha Murray-Lusby.

But don't be too quick to write off all trusts, she adds. Couples in a second marriage will want a fixed amount in a bypass trust to make sure kids from their first marriages aren't stiffed. A bypass trust can also provide valuable asset protection--a consideration if, for example, the surviving spouse is an architect, obstetrician or some other professional who could face big legal claims.

Still, many couples in stable first marriages might sensibly opt to leave everything to each other outright (with an "I love you" will) and include a backup "disclaimer" trust for the kids. With this setup, at the death of a spouse the surviving widow or widower can decide, based on the laws and the couple's assets at that time, which assets, if any, to disclaim (turn down) and divert into the kids' trust.


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Plan for state taxes

Currently 21 states and the District of Columbia have estate or inheritance taxes, or both, in place for 2011. Estate taxes are levied on any amount above an exemption--typically $1 million--left to someone other than a spouse. Inheritance taxes are based on who gets the cash and can hit the first dollar of a bequest. So, for example, Maryland imposes an estate tax of up to 16% above a $1 million exemption and a 10% inheritance tax on every dollar left to a niece, nephew, friend or lover, but not on money left to children, grandchildren, parents or siblings. (Any estate tax owed is reduced by the inheritance tax paid.)

Bottom line: Couples worth $2 million or more living in Maine, Maryland, Massachusetts, Minnesota, New York and Oregon, which all have $1 million state estate tax exemptions, will still want to put at least $1 million in a bypass or disclaimer trust at the first spouse's death.

For details on your own state's estate tax exemption for 2011, see
the Forbes Tax Map.


Give while you're still breathing

As in past years you can make annual gifts of up to $13,000 to as many people as you want without worrying about gift taxes. If you want to give even more, there's a lifetime gift tax exemption that jumps to $5 million in 2011 and 2012, up from $1 million in 2010. (The estate tax lapsed in 2010, but the gift tax didn't. Any gift tax exemption used reduces an individual's estate tax exemption.) The generation-skipping transfer tax, an extra tax on gifts and bequests to grandkids if their parents are still alive, also now has a $5 million exemption, up from $1 million in 2009.

When that $5 million gift/GST exemption is leveraged with such fancy wealth-transfer techniques as grantor-retained annuity trusts and installment sales to trusts, the rich will be able to transfer huge sums, tax free, to trusts for their kids, grandkids and generations beyond. (Dynasty trusts, they're called.) "This is a huge gimme to the wealthy,'' says Jonathan Forster, an estate lawyer with Greenberg Traurig, in McLean, Va. Since GRATs and other techniques could be restricted when Congress finally goes into deficit-cutting mode and since the GST tax exemption isn't portable between spouses, lawyers are advising the very rich to begin transferring assets in 2011.

Less wealthy folks can make good use of the gift exemption, too--to avoid state taxes. Oddly most states with inheritance and/or estate taxes don't tax gifts. (The big exception is Tennessee, which imposes up to a 16% tax on gifts above $13,000 a year to close relatives and above $3,000 to others.) So if you have enough left for your own retirement years, you can start reducing prospective state tax bills by making gifts. This is also a boon for unmarried couples who want to transfer assets between partners. Be careful, however, of quirky state gotchas; for example, in Maryland, gifts made within two years before the donor's death get hit with state inheritance but not state estate tax, says Rockville, Md. lawyer Steven Widdes.

Keep income taxes in mind

Under the 2011 and 2012 estate tax law (and likely in the future, too) at your death, all your assets are "stepped up" to their current market value--meaning heirs can sell right away without owing capital gains tax. So don't give away already appreciated assets (say a primary or vacation home or collectibles) you might otherwise hold until death.

On the other hand, the $5 million gift tax exemption provides an opportunity to shift income to relatives taxed at lower rates. Got $30,000 worth of Google stock you bought for $10,000 and are ready to dump? Give it to your starving-artist daughter and she can sell it at a 0% capital gains tax rate in 2011 or 2012. (Warning: Full-time students up to age 24 are subject to the kiddie tax, which taxes investment income and gains at a parent's higher rate.)

CPA Robert Keebler of Green Bay, Wis. suggests the owner of a profitable small business run as a pass-through (the business doesn't pay corporate income taxes but passes all profit through to its owners' tax returns) consider gifting partial ownership stakes to adult children, who might pay taxes on their share of profits at, say, a 25% rate, instead of the 35% the parents pay. "The income-shifting opportunities are enormous," he says.

Last Minute Tax Savings (WSJ)

The 10 Money Moves to Consider Before 2010 Expires Did You Give Holiday Gifts to Co-Workers? You Might Be in Luck on Taxes.

By JENNIFER OPENSHAW

New Year's Eve is almost here, but don't let that stop you from making some important money moves now, before Dec. 31, so you can reap the benefits in 2011.

Michael Casey says that with New Year's Eve almost here, you will want to consider these important money moves before year end to reap benefits in 2011.
.1) Take investment losses. The end of the year is a great time to review your portfolio and your asset allocation. If you have a dog of a stock or mutual fund that you want to eliminate, it is often a good idea to do it by Dec. 31.

The losses you take can offset the gains you have realized on other stocks or funds and help reduce your tax bill.

For example, say you sold your Apple stock and made $10,000. But you have a poor-performing fund relative to other options that, if you sold it, would result in a $5,000 loss. When taken together, the losses from selling leave you with a net taxable gain of $5,000, far less than had you not sold the investment dog.

2) Max-out your retirement accounts. Many companies have reinstated their 401(k) matching contribution after wiping it out during the recession. But even if not, your 401(k) is still one of your top savings vehicles, and you should fund it as much as possible by year-end. The maximum contribution in 2010 is $16,500 plus $5,500 for those 50 and older.

3) Check your paycheck withholding. The new tax law means your take-home pay next year likely will be higher, thanks to lower Social Security taxes, which for most workers will be cut to 4.2%, from 6.2% now.

So, make sure you aren't having too much or too little withheld. Too much means Uncle Sam is earning interest on your money (though you will get a refund) and too little means you will have a tax bill.

While it is always a good idea to review your withholding annually, the new changes make it even more important. You should also review your withholding if you are an individual or couple with multiple jobs, are having children, getting married, getting divorced or buying a home, or are someone who typically winds up with a large refund at the end of the year.

4) Deduct holiday gifts up to $25 for business. Did you give any holiday gifts to co-workers, vendors, or prospective customers or partners? If so, you will want to keep those receipts since you will be able to deduct up to $25 for such gifts.

This means the $25 for those gourmet chocolate pretzels or toward tickets to the theater would actually run you about $17 out-of-pocket, depending on your tax bracket.
Also, you will want to include anything deductible for your holiday party so long as it had a business purpose.

5) Give to a relative and reduce your tax bill. We have written before about all the ways grandparents or simply those who have some extra wealth can help others, especially someone trying to close the college funding gap.

Give the gift of education or something else worthwhile while you are alive and you will not only reduce your taxable estate, but you will enjoy seeing it put to use.

You can give up to $13,000 a year to someone if you are single ($26,000 if married) without facing gift taxes. If you contribute to a "529" college-savings plan, however, you can front-load your gifting and give up to five times that amount in one year—that is $130,000 if you are a couple—without facing a gift tax. Nice.

6) Donate to a charity. 'Tis the season to give, and if you have been one of the lucky ones who did better financially than you expected, maybe you are up for sharing more of it. You can give cash or stock to a charity, but what's better?

If the stock is worth more than you bought it for, you are usually better off donating it to charity instead of selling it. That allows you to avoid the capital-gains tax on the profit. For example, say you bought 100 shares of a stock at $10 per share and they are now worth $30 per share.

If you donate the stock to charity, you won't have to pay the capital-gains tax on the $2,000 in profit. If you have had the stock for at least a year, you will also be able to deduct the fair-market value of it on your taxes, as long as you itemize.

On the flip side, if the value of the stock is less than you bought it for, you will probably want to cash it first so you can deduct the loss.

Of course, donating money is usually deductible (as long as you itemize). And if you are donating your services, remember that only mileage, not your time, is deductible.

7) Make an estimated tax payment early. If you didn't pay enough to the federal government last year, you may face an even bigger tax bill come April 15. For instance, maybe you didn't have enough taxes withheld from your paycheck or you made a chunk of money on an investment. If you pay estimated taxes, consider paying by Dec. 31.

8) Pay January's mortgage in December. Similarly, making a mortgage payment early will increase your mortgage deduction for 2010.

Perhaps all the talk about possibly eliminating this valuable deduction might spur you to move on this one.

9) Enroll in your employer's flexible-spending account. These accounts allow you to sock away up to $5,000 (the maximum amount varies by employer) on a pretax basis, much like a 401(k), to cover out-of-pocket health-care costs. Also, find out whether your employer offers a similar benefit for child-care expenses.

Open enrollment is typically the only time to make changes to your plan and that is usually in November. However, you may be able to make changes if you have experienced a "qualifying life event," such as a marriage or divorce, a new child, a change in your employment or you go on family medical leave.

10) Contribute to your IRA. While you have until April 15 to fund your IRA, whether a Roth or traditional, getting it done before then will leave you with one less thing to worry about.

At a minimum, get the paperwork done to open an account if you don't have one already. The maximum you can contribute is $5,000 and an additional $1,000 for over-50 retirement savers for a total of $6,000. And don't forget your nonworking spouse—you can save for him or her, too.

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