Year-end tax planning tips [UPDATED]Published 10:36am Monday, November 5, 2012 Updated 12:43pm Monday, November 5, 2012
Given the current level of uncertainty, year-end tax planning for 2012 is extremely challenging. With a host of major tax provisions expiring at year-end, and new taxes taking effect Jan. 1, 2013, some year-end moves have the potential for significant savings.
But will new legislation change the tax landscape once again? It’s impossible to say for sure. Your best bet is to evaluate your tax situation now, consider your options, and stay on top of late-breaking legislative developments.
Higher tax rates
A fairly common strategy at year-end is to try to shift income into the following year by, for example, deferring a year-end bonus, or delaying the collection of business debts, rents, and payments for services. This year, however, you have to consider any income timing moves very carefully.
That’s because federal income tax rates are scheduled to jump in 2013. We’ll go from six federal tax brackets (10 percent, 15 percent, 25 percent, 28 percent, 33 percent, and 35 percent) to five (15 percent, 28 percent, 31 percent, 36 percent, and 39.6 percent).
The maximum rate that applies to long-term capital gains will generally increase from 15 percent to 20 percent. And while the current lower long-term capital gain rates apply to qualifying dividends, starting in 2013, dividends will be taxed as ordinary income.
Could the current federal income tax rates be extended yet again?
Of course, but it’s far from a certain bet. That means any moves you contemplate have to be considered in the context of several “what-if” scenarios.
Other important changes
The earned income tax credit, the child tax credit, the adoption credit, and the American Opportunity (Hope) tax credit all revert to prior, lower limits and (less generous) rules of application.
Also gone in 2013 is the ability to deduct student loan interest on student loans after the first 60 months of required repayment.
Tax changes that were originally made to address a perceived “marriage penalty” also expire at the end of 2012.
If you’re married and file a joint return with your spouse, you’ll see the effect in the form of a reduced 2013 standard deduction amount, as well as in lower 2013 tax bracket thresholds in the tax rate table (i.e., couples will move into higher rate brackets at lower levels of income).
Talk to a
When it comes to year-end tax planning, there’s always a lot to think about. And this year is more complicated than usual.
A financial professional can help you evaluate your situation, keep you apprised of any last-minute legislative developments, and determine if any year-end moves make sense for you.
Bonnie Denzel is a financial advisor with Dorn and Co., in Fergus Falls.