TAX PLANNING AFTER THE ELECTION: NOW WHAT?



Eddie Quigg, CPA, JD



No different, more of the same, status quo—Romney’s defeat, and an unchanged Congress—these are terms being used to describe our post-election tax and political landscape, which almost guarantees that a permanent solution to the so-called “Fiscal Cliff” will not be in place before the end of the year. Let’s call it “Gridlock—the Sequel”. We all know how the original ended---the can was kicked down the road, and here we are again, still staring at that can. Both sides are talking bipartisanship, but neither is retreating from their original positions—the Republicans in control of the House are against raising taxes-- and the Democrats in control of the Senate, following Obama’s lead, insist on raising taxes on the so-called rich.  Because of the dire consequences of inaction for the economy, some kind of temporary agreement before year-end or soon after is likely-- an extension of the current tax rates, and an agreement to raise the debt ceiling, until a permanent solution is passed sometime in 2013 or early 2014.

WHAT IS THE FISCAL CLIFF?

The short answer is that the Fiscal Cliff is what will happen on January 1, 2013—the higher taxes that kick in after the expiration of the Bush-era tax rates, and the date of implementation of the automatic spending cuts for defense and other government programs, if Congress fails to act before year-end, or early in 2013. Most importantly, there are the consequences to the economy of falling off the cliff-- a really noisy comic book type “Splat!”, only the consequences are real, and very unfunny. Hence the temporary agreement that is likely to be reached, mentioned above. We can be thankful that the noise of the election has largely died down, unfortunately the Fiscal Cliff noise is just beginning.

MAJOR 2013 TAX INCREASES

There are tax increases that are certain to take effect in 2013, notably those in the Patient Protection and Affordable Care Act, a/k/a “Obamacare”. The major increases include an additional tax of 3.8% on the lesser of your investment income or your “excess” modified adjusted gross income (MAGI) over $250,000 or more for those married filing jointly, and over $200,000 for single taxpayers. The types of income subject to the tax are dividends, interest, capital gains, rental income, income  from S corporations, partnership income, and income from annuities. There are important exceptions for retirement pay and “active” trade or business income. The details of what constitutes “active” income are unknown at this time.

The other major increase is an additional 0.9% Medicare hospital insurance tax (HI tax) that will apply to wages or self-employment income of individuals with MAGI over the above thresholds.

TAX PLANNING SUGGESTIONS FOR 2013

For taxpayers likely to be subject to additional taxes in 2013, the following tax planning ideas should be considered:

·         Taxpayers may want to sell long-term capital gain assets in 2012 rather than 2013 in anticipation of an increase in the rate, or the effect of the 3.8% surtax. This applies to stocks, bonds, appreciated real estate, and other capital gain assets.

·         Additional acceleration strategies include electing out of the installment method for qualifying assets sold in 2012, foregoing like-kind exchange  treatment, exercising non-qualified stock options, and accelerating the payment of year-end bonuses into 2012.

·         For owners of C corporations and S corporations with earnings and profits (E&P) from prior C years, they may want to pay dividends in 2012. There are various options available to S corporations to pay these dividends.

·         Conversely, it may be more tax advantageous to defer deductions to 2013 for those who anticipate being in a higher tax bracket, such as retirement plan contributions, health plan contributions, employee bonuses, not electing 50% bonus depreciation or section 179 expensing  for the purchase of business assets . Making certain accounting method elections or changes may also achieve these results.

·         For S corporation shareholders and  partners in non passive businesses, and potential real estate professionals, it is important to analyze your participation in the business to determine your “active” or “passive” status for 2013 in anticipation of the 3.8% surtax. Making changes in 2012 in this regard could be beneficial for 2013.

·         Before implementing the above ideas and strategies, it is important to factor in the effect of the alternative minimum tax.

For additional information or assistance please call or contact us at your convenience.