Time to Plan for 2013 Tax Changes!

The election’s over and the end of the year is rapidly approaching, yet many tax law changes are still up in the air. With several provisions set to expire and other new provisions set to go into effect, taxpayers could feel a difference in their pocketbooks come 2013. The tax planning challenge this year is not knowing whether Congress will act on these scheduled changes.

Expiring Provisions

The so-called “Bush tax cuts” will expire December 31st, unless Congress extends them.

Related to individuals: Individual income tax rates will rise to a maximum of 39.6 percent, long-term capital gains rates will increase to 20 percent, and qualified dividends will no longer be taxed at 15 percent and will instead be taxed ordinary income tax rates (maximum 39.6 percent).

Related to estate and gift taxes: The estate and gift tax exemption will sharply decline from $5.12 million to $1 million, and estates with assets greater than the $1 million exemption will have higher tax rates in 2013.

New Provisions Related to Healthcare Reform

Certain taxpayers will see a new 3.8 percent Medicare surtax on net investment income, such as interest, dividends, capital gains, and unearned income of estates and trusts. Additionally, the Affordable Care Act will add an extra 0.9% Medicare tax to the current 2.9% Medicare tax on earned income in excess of $200,000 for individuals and $250,000 for couples married filing jointly and $125,000 if you are married and file separately.

Capital Gains Rates

If capital gains rates rise as scheduled, tax planning strategies will be very different this year.  Instead of traditional year-end tax planning strategies, such as deferring income, accelerating deductions, and offsetting gains and losses if possible, this year, individuals should consider accelerating income, deferring losses and deductions. You should consider harvesting gains in your investment portfolio to take advantage of the lower rates before the end of 2012. If you sell in 2013, it could result in more tax because of the higher capital gains rate.

Estate, Gift and Generation-Skipping Exemption

The federal gift tax remains in effect this year and is expected to continue into the future, however, the upcoming changes present tax planning opportunities in this area.

This year, the annual gift tax exclusion is $13,000 and the rate is 35 percent. The current lifetime individual gift tax exemption is $5.12 million (or $10.24 million for a married couple). Any gifts above that amount would be taxed at a 35 percent rate. The exemption is scheduled to drop to $1 million per taxpayer in 2013, and the rate is set to increase to 55 percent. Now is the time to make significant gifts or risk losing your opportunity at the end of 2012.

Another option is to make gifts to your grandchildren either outright or in trust for their benefit using the $5.12 million generation-skipping transfer tax exemption in 2012. Next year this exemption is set to decrease to $1.4 million in 2013.

Alternative Minimum Tax

Another issue Congress will have to consider is whether it will once again enact a patch for the alternative minimum tax (AMT). The AMT is scheduled to go into effect at year-end, potentially increasing taxes for millions of Americans. The AMT has been around for decades, however, it has not been indexed for inflation. Therefore, while average incomes have grown, the income levels referenced in the AMT have stayed the same, which means more taxpayers will be affected. Currently, only 4 million people pay the AMT, which was designed to eliminate deduction loopholes the wealthy could use to pay less in taxes. If no action is taken by Congress, 28 million Americans will be required to pay it.

With all of the uncertainty surrounding the tax laws this year, it is critical you speak with your tax practitioner early about your options and how to implement the right plan to reach your personal financial goals. There is no time to waste.

Martin J. Kurtz, CPA, ABV, CFF, is a client services executive at Kaufman Rossin’s Ft. Lauderdale office. He has more than 40 years of experience as a Certified Public Accountant. Kaufman, Rossin is one of the top CPA firms in the country. Marty can be reached at mkurtz@kaufmanrossin.com.

Louis Balbirer, CPA, MST, is a director of tax services with Kaufman Rossin He has 20 years of experience providing tax and accounting services to clients and can be reached at lbalbirer@kaufmanrossin.com.

Read about 2013 tax changes at cityviewftlauderdale.com.