The most recent tax deadline has long-since passed and the furthest thing from most people’s minds is the next one. However, 2013 is expected to be a year of uncertainty due to potential major changes regarding tax laws and rates, and the time to start planning for it is right now.
Industry experts seem to agree that, on average, it takes people six months to properly complete their tax planning – with 60 days each needed to educate themselves on available opportunities, to determine which approach is right for them and finally to implement the plan that works best. Considering that six months from today puts us in February 2013, suddenly next year’s tax season doesn’t seem so far away.
What’s more, tax planning is never “one size fits all” – the needs of every individual and business can vary dramatically. Gifting, creating trusts, increasing or decreasing deductions – these and other considerations all require careful deliberation by the person or people making the decision.
And then there is the current situation we find ourselves in, where tax policy is being heavily debated at the national level. This too can and will have a major impact on how people prepare for next year, and creates a further impetus to start now. The possibility of the “Bush Tax Cuts” expiring at year’s end, the recent Supreme Court decision upholding the Affordable Care Act and other key tax provisions that may or may not change make this a volatile time for tax planning, and one that requires immediate attention.
Here are a few examples of key tax provisions to which particular attention must be paid, the sooner the better.
· “Bush Tax Cuts” – Without question, this is the single biggest tax issue on the minds of Americans right now – the federal income tax rates put into effect under President Bush a decade ago are scheduled to expire at the end of 2012. If there is no change in current law, the top marginal tax rate will increase from 36% to 39.6% after the first of the year, long-term capital gains will be taxed at a maximum rate of 20% (up from 15%) and dividends will be taxed as ordinary income. This all adds up to a bottom line of a higher tax bill for many individuals and businesses next year if these cuts expire, which means planning for that starting right now is essential.
· Estate tax rate and exemption – Under current law, the estate tax rate will increase from its current rate of 35% this year to 45% in 2013, and the lifetime exemption amount will decrease from $5.12 million to $1 million down at the end of 2012.
· Alternative Minimum Tax – Another large tax provision certain to have an impact on many individuals is the higher Alternative Tax Exemption, or AMT patch. For this past tax year, a taxpayer filing a joint return was allowed an AMT exemption amount of $74,450. Without an extension of this tax provision, that same AMT exemption amount would decrease to $45,000 in the next tax year, which is of course a tremendous drop. Not only does this mean that more people will have to pay the AMT patch, but with an AMT tax rate of 26%, when you figure $29,450 more in taxable income (the difference between $74,450 and $45,000), it adds up to more than $7,600 in new taxes people will have to pay next year.
Again, regardless of what happens in Congress between now and the end of the year, people can still ensure economic stability for themselves and their future. But the key is starting now by consulting your tax professionals, while there is time to plan without being caught up in what is certain to be a chaotic early 2013.
Andrew S. Lattimer, CPA, is a partner with BlumShapiro.