2012 Year End Tax Planning - The Time to Act is Now!

With the fiscal cliff looming, year-end tax planning is even more difficult in 2012 than ever before. "Will they or won't they" is the question being asked of Congress.  "Who knows" is my answer right now.  

While you can't do anything about Congress, you do still have time to take a look at what your tax bill might be for 2012.  

  •  Consider the amount you set aside in your employer's health flexible spending account (FSA). Starting in 2013, the maximum contribution to a health FSA will be reduced to $2,500, and you get reimbursements for over-the-counter medications.
  • If you have a health savings account (HSA) consider making a full year's worth of HSA contributions if you haven’t maxed out.  If you have an HSA, contributions are deductible, earnings are tax-deferred, and distributions are tax free for qualifying medical expenses.
  • If you are already thinking of selling assets that are likely to yield large gains because of a low cost basis, try to make the sale before year-end (considering market conditions).  The 2012 long-term capital gains rate ia a maximum of 15%, but it’s scheduled to rise to 20% in 2013. Also, if your adjusted gross income exceeds certain limits $250,000 for joint filers/$125,000 for a married individual filing a separate return/$200,000 for a single person, gains in 2013 might trigger an extra 3.8% tax (the so-called “unearned income Medicare contribution tax”).
  • You can lock in capital gains of 15% on stock you think still has plenty of room to grow by selling it and then repurchasing it. You will owe federal capital gains tax at 15%, but have a higher cost basis against any future sales at a potentially higher capital gains rate and 3.8% Medicare tax.
  • Look at contributing to Roth IRAs instead of traditional IRAs. While not tax deductible when made, Roth IRA payouts are tax-free and thus immune from the threat of higher tax rates, as long as they are made (1) after a five-year period, and (2) on or attaining age 59-½, after death or disability, or (3) for a first-time home purchase.  Also, you can look at converting a traditional IRA to a Roth.  You will need to pay taxes on the amount converted, but that might be a lower number if income tax rates go up.
  • Don’t forget to take required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retired plan) if you have reached age 70-½.
  • For 2012, unreimbursed medical expenses are deductible to the extent they exceed 7.5% of your AGI.  However, starting in 2013, if you are under age 65, these expenses will be deductible only to the extent they exceed 10% of AGI. If you have a shot at exceeding the 7.5% this year, try to accelerate any costs you will need to pay next year into this year.
  • Pay state and local income taxes due April 2013 in 2012 so you can deduct them from this year’s tax return.
  • Try to settle an insurance or damage claim in order to maximize your casualty loss deduction this year.
  • Make annual exclusion gifts of up to $13,000 per beneficiary.

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2013 Key Medicaid Figures

Some Medicaid eligibility figures for seniors in need of long term care are tied to inflation. The Centers for Medicare and Medicaid Services just released the 2013 figures:

Minimum Community Spouse Resource Allowance: $23,184

Maximum Community Spouse Resource Allowance: $115,920

Maximum Monthly Maintenance Needs Allowance: $2,898

The minimum monthly maintenance needs allowance for the lower 48 states remains $1,891.25 (2,365 for Alaska and 2,176.25 for Hawaii) until July 1, 2013.

Home Equity Limits:

Minimum: 536,000

Maximum: 802,000

 

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Hurricane Sandy Extensions of IRS Time to File

The IRS has extended time to make tax payments and file returns of taxpayers in counties that have been designated as federal disaster areas qualifying for individual assistance.

Affected taxpayers are those listed in Reg. § 301.7508A-1(d)(1) and would include any person whose principal residence, and any business entity whose principal place of business, is located in the counties designated as disaster areas.  For a trust or estate this would include any one that has its tax records in the counties designated as disaster areas.

Under Code Sec. 7508A, IRS gives affected taxpayers an extended date to file most tax returns or to make tax payments, including estimated tax payments, that have either an original or extended due date falling on or after the date of the disaster (Superstorm Sandy).

The postponement of time to file and pay does not apply to information returns in the W-2, 1098, 1099 or 5498 series, or to Forms 1042-S or 8027.

New Jersey: The following are federal disaster areas qualifying for individual assistance on account of Hurricane Sandy: Atlantic, Bergen, Burlington, Camden, Cape May, Cumberland, Essex, Gloucester, Hudson, Hunterdon, Mercer, Middlesex, Monmouth, Morris, Ocean, Passaic, Salem, Somerset, Sussex, Union and Warren counties

For these New Jersey counties, the onset date of the disaster was Oct. 26, 2012, the extended date is Feb. 1, 2013 (which applies to the fourth quarter individual estimated tax payment, normally due Jan. 15, 2013; payroll and excise tax returns and accompanying payments for the third and fourth quarters, normally due on Oct. 31, 2012 and Jan. 31, 2013 respectively; and tax-exempt organizations required to file Form 990 series returns with an original or extended deadline falling during this period).

New York: The following are federal disaster areas qualifying for individual assistance on account of Hurricane Sandy: Bronx, Kings, Nassau, New York, Queens, Richmond, Rockland, Suffolk and Westchester counties

For these New York counties, the onset date of the disaster was Oct. 27, 2012, the extended date is Feb. 1, 2013 (which applies to the fourth quarter individual estimated tax payment, normally due Jan. 15, 2013; payroll and excise tax returns and accompanying payments for the third and fourth quarters, normally due on Oct. 31, 2012 and Jan. 31, 2013 respectively; and tax-exempt organizations required to file Form 990 series returns with an original or extended deadline falling during this period). The deposit delayed date is Nov. 26, 2012. 

Fiscal Cliff or Taxageddon?

Whatever you want to call it, the time to pay the piper is here.  Tax reform has been pushed and patched for over a decade now, and if the people in Washington can't come to a decision, then we all lose.  So what is in store if Washington can't get its act together by December 31, 2012?

·         Individual income tax brackets will change to 15, 28, 31, 36 and 39.6 percent, from the present levels of 10, 15, 25, 28, 33 and 35 percent.

·         The long-term capital gains tax rate will go from15% to 20%

·         Dividends will go from being taxed at a maximum of 15% to being ordinary income, taxed as high as 39.6%

·         The Alternative minimum tax (AMT), designed to ensure the very wealthy pay income taxes will capture a huge number of upper middle class taxpayers, all because the AMT does not adjust with inflation (how hard would that be to do Congress??)

·         Elimination of the cut in the payroll taxes.  Workers currently pay  4.2 % (a temporary reduction on the usual 6.2%)

·         Estate tax / Gift Tax/ GST Tax exemption amount will go down from $5,120,00 to $1 million and the estate and gift tax top rate will go from 35% to 55%.

·         $1.2 trillion in across-the-board cuts in federal spending since Congress couldn't come up with a deficit-cutting deal in January 2012.  Economists fear this could be saying hello to that double dip recession.

·         End of extended unemployment benefits.

·         A double-digit drop in Medicare reimbursements which could cause doctors to cease treatment of those over 65.

·         And don't forget that niggling $16.4 trillion debt ceiling we keep pushing up. 

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