June 19, 2012 § Leave a comment
If you are like most people, one of the last things that is probably on your mind during the month of June is taxes. After all, tax season ended two months ago, and well, we don’t have to deal with that “less than favorite” relative, Uncle Sam until next year – right? Well not so fast. With the Bush-Era Tax Rates scheduled to expire December 31, 2012, a little tax planning for you and your business now, could save you money and be well worth the effort later. Following are changes that will occur should the current tax rates expire, along with a few tips to help you minimize your tax liability.
Changes as the Bush-Era Tax Cuts Expire:
- Tax Rates: Tax rates for individuals will remain at 10%, 15%, 25%, 28%, 33% and 35% for the duration of 2012, but will revert back to 15%, 28%, 31%, 36% and 39.6% in 2013.
- Capital Gains Maximum Tax Rate: This tax rate is currently at 15%. However, similar to marginal tax rates, the capital gains rate will increase to 20% in 2013.
- Qualified Dividend Income: Dividend Income is taxed at the same rates as capital gains (maximum rate of 15%). However after December 31, 2012, dividends could be taxed at a rate as high as 39.6%.
- Itemized Deductions: Throughout 2012, itemized deductions will remain the same. However in 2013, a phase-out of total itemized deductions is scheduled to be implemented. If this had been in effect for 2012, it would have been applicable to taxpayers with an adjusted gross income greater than $173,650. (This amount adjusts for inflation.)
Tax Planning Tips:
- Get Organized: You need to keep close track of your deductible expenses through the year. If a pile is starting to accumulate, take the time to sort through your receipts and file accordingly. A little organization now, will save you hours at tax time, and allow you to accurately estimate your expenses for a tax projection and planning.
- Manage Your Adjusted Gross Income: Many tax breaks are based on your adjusted gross income (AGI). Several breaks are available to you dependent on your AGI, such as the child tax credit, rental real estate loss allowance, education credits and deductions, and other tax breaks.
- Set Up and Contribute to a Retirement Plan: If you own a business, you can save for retirement through a tax-advantaged plan. For instance, you may establish a Savings Incentive Match Plan for Employees (SIMPLE) or a Simplified Employee Pension (SEP) with relative ease. This will allow you to plan for your future and reduce your tax liability.
- Hire Your Child: If you are self-employed, you can hire your child which shifts income from your tax bracket to their tax bracket. You will also have payroll tax savings if your child is under the age of 18 and the child will be eligible to contribute to an IRA.
- S-corporation Losses: An S-corporation’s losses are deductible by the corporation’s shareholders up to the amount of the shareholder’s basis in his or her corporate stock. If it looks like your S-corporation will show a loss for the year, make sure that you have sufficient basis in your S-corporation stock to take advantage of the loss deduction.
- Capital Gains: As stated above, the anticipated capital gains tax rate is set to be at least 20% in 2013, so if you are considering selling highly appreciated stock it might be wise to do it before year-end at a lower tax rate of 15%.
These are just a few items to assess during a mid-year business review. There are more. But taking the time to meet with your CPA and discuss the items listed above will ensure you have a good understanding of your company’s financial situation and the information needed to minimize your tax liability….and make your interactions with Uncle Sam go “relatively” well.
Kathi Koenig, CPA