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2012 Year End Tax Letter

Significant changes are coming with personal taxes, but as it stands right now, no one knows the entire set of changes we all will have to face. Over a dozen tax cuts will be expiring at the end of the year unless Congress acts soon. While we expect Congress will enact the “patch” to the alternative minimum tax exemptions as they do every year, other credits and deductions may also expire.

For the 2013 year, there are two new taxes to be considered. The Medicare .9% surcharge on earnings over $250,000 for joint filers and $200,000 for single filers will take effect for those higher income taxpayers. Accelerating earned and unearned income into 2012, for those higher income taxpayers, may help minimize the exposure to these new taxes. Ordinarily, the philosophy is to defer income, but this year it may be different. The second new tax is a 3.8% tax on investment income for those taxpayers with over $200,000 modified adjusted gross income for singles and $250,000 for those filing jointly. The smaller of either one’s investment income or the excess of modified AGI over the above mentioned threshold will be taxed. Taxable items include dividends, interest, capital gains, annuities, passive rental income and royalties.

There several moves that one may want to make today, based on what we do know at this time, to minimize either taxes or the effect of changes we do know for next year.
  1. The capital gains tax rates will increase in 2013. Planning to sell a long-term holding security in the near future? Do it this year to guarantee the 15% preferred tax rate and avoid the potential higher/capital gains taxes and the new 3.8% investment tax.
  2. Flexible spending accounts are “use or lose” by year end unless your employer allows you to spend the funds from 2012 in early 2013. Any contributions made in 2013 will be limited to $2,500.
  3. Medical expense deductions for 2013 will be limited to amounts over 10% of one’s adjusted gross income except for taxpayers over 65 years. Refilling prescriptions and other last minute medical expenses can save money if you have already reached the 2012 threshold of 7.5% of AGI.
  4. College tuition paid in 2012 for undergraduate study will be eligible for the $2,500 American Opportunity Tax Credit (AOTC) for qualified taxpayers. The Hope Credit, a smaller credit with more restrictions and no refundability, is scheduled to return in 2013 unless the AOTC is extended or made permanent.
  5. Prepaying state and local taxes may save you some money if you are not subject to the Alternative Minimum Tax (AMT). The phase-out of itemized deductions, for higher income taxpayers, will return next year and will limit the deductibility of these taxes and other itemized deductions.
  6. Charitable contributions paid by credit card in 2012 will be deductible this year, even if the bill isn’t paid until 2013. These contributions will be deductible on this year’s return.
  7. Stock options and restricted stock awards exercised in 2012 will avoid the increased Medicare tax and the new 3.8% investment tax that start in 2013.
  8. Annual or one time gifts up to $13,000 may be made in 2012 without tax consequences. Future gifts made in 2013 will be allowed up to $14,000 without filing a gift tax return or affecting your estate exemption.
  9. The estate tax is slated to increase, unless Congress acts, with the exemption decreasing to $1,000,000 (pre 2011 tax year level) for estates from the current $5,000,000 exemption. Strategic year end gifting now may help reduce one’s taxable estate.
  10. Estates & trusts will now be faced with the new 3.8% investment tax on any undistributed income over $11,650. The trust or estate must adjust their 2013 estimates accordingly if this new tax applies.
  11. Mileage rates for business auto use in 2012 are 55.5 cents per mile and will rise to 56.6 cents per mile for 2013. The charitable mileage rate for 2012 is 14 cents per mile and will remain the same for 2013. Medical and moving auto mileage rates are 23 cents in 2012 and increase by a penny to 24 cents per mile in 2013.
  12. The 2011 new IRS regulations on the deduction and capitalization relating to tangible property – the so-called “repair regulation” - will now be delayed until January 1, 2014. These regulations are a framework for analyzing whether and when costs incurred in acquiring, maintaining, or improving tangible property must be capitalized on one’s books.
  13. Since the current tax of 15% on qualified dividends will increase, closely held corporations should consider paying out dividends before the end of this year.
  14. Section 179 deduction for 2012 is set at $139,000 and it may shrink to as little as $25,000 in 2013 for purchases of new equipment. Bonus depreciation for 2012 is now set at 50% and may go to zero in 2013.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Pursuant to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, nothing contained in this communication was intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose. No one, without our express prior written permission, may use or refer to any tax advice in this communication in promoting, marketing, or recommending a partnership or other entity, investment plan, or arrangement to any other party.

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Individuals: File form 1040 or extension
Trusts & Estates: File calendar year estates & trusts form 1041 or extension
Individuals: File first quarter estimated tax
Corporations: File first quarter of estimated tax
Individuals: City first quarter estimated payment due
Corporations: File form 1120 or extension

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