For a variety of reasons, 2012 will likely bring great uncertainty when it comes to taxes. So to prepare an effective tax plan for 2012, start now by looking at the many issues in flux to see where you might be able to make smart moves to minimize your taxes.
What’s the big deal?
If you’re the optimistic sort, you might respond to all of this uncertainty by saying, “What’s the big deal? Congress will just extend all of these rates and breaks as usual.”
Granted, they might. Or there could be another significant tax bill on the way. But it’s even harder than usual to predict what will happen in the coming months because of the increased focus on the budget deficit and the fact that it’s an election year.
And, while the advantageous rates and breaks we’ve discussed don’t expire until after 2012, a wide variety of tax planning strategies depend on looking ahead at not only the rest of the current year, but also the next year. Your goal is to time income and deductions to your advantage. Yet doing so is more difficult when there’s so much uncertainty about what tax rates will apply and what breaks will be available either this year or next.
After all, traditional tax planning often calls for deferring income to the next year and accelerating deductions into the current year in order to defer tax. But these steps could be costly if rates go up, because you’ll be pushing taxable income into a year when it will be subject to a higher tax rate. In addition, deductions are more valuable when your rate is higher.
How can you cope?
Although there’s no tax-savvy crystal ball that can tell you precisely what’s going to happen, you do have plenty of coping measures worth discussing with your tax advisor:
Sell long-term appreciated assets before the favorable 15% capital gains rate jumps to 20%. This could be an especially beneficial move if you’ll also likely be subject to the new Medicare tax on gains next year.
Accelerate income into 2012, where possible. Doing so will help you take advantage of the lower ordinary rate—again, particularly if you’d also be subject to the new additional Medicare tax noted above. If you’ll be subject to deduction phaseouts in 2013, consider whether it would make sense to also accelerate deductible expenses into 2012 while the phaseout is repealed.
This has been a general discussion and is not intended as advice to anyone. Always discuss your particular circumstances with a qualified advisor before taking any actions.
This article has been provided by Norm Grill.
Norm Grill, CPA, is managing partner of Grill & Partners, LLC, certified public accountants and advisors to closely held companies and high-net-worth individuals, with offices in Fairfield and Darien, 203 254.3880.