News & Tech Tips

The 2012 Gift Tax Annual Exclusion: Use It or Lose It

mnarog on December 6, 2012

The 2012 gift tax annual exclusion allows you to give up to $13,000 per recipient tax-free without using up any of your lifetime gift tax exemption. If you and your spouse “split” the gift, you can give $26,000 per recipient. The exclusion is scheduled to increase to $14,000 ($28,000 for split gifts) in 2013.

The gifted assets are removed from your taxable estate, which can be especially advantageous if you expect them to appreciate. That’s because the future appreciation can avoid gift and estate taxes.

But you need to use your 2012 exclusion by Dec. 31 or you’ll lose it. The exclusion doesn’t carry from one year to the next. For example, if you don’t make an annual exclusion gift to your grandson this year, you can’t add $13,000 to your 2013 exclusion to make a $27,000 tax-free gift to him next year.

We can help you determine how to make the most of your 2012 gift tax annual exclusion.

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Self Employed? Set Up a Retirement Plan by December 31!

mnarog on November 28, 2012

If you’re self-employed, you may be able to set up a retirement plan that allows you to make much larger contributions than you could make as an employee. Plus, if you set up one of the following plans by Dec. 31, 2012, you can make deductible 2012 contributions until the 2013 due date of your tax return:

1. Profit-sharing plan. This allows discretionary contributions and flexibility in plan design. The 2012 contribution limit is $50,000 ($55,000 for taxpayers age 50 and older).

2. Defined benefit plan. This plan sets a future pension benefit and then actuarially calculates the contributions needed to attain that benefit. So you may be able to contribute more to a defined benefit plan than to a profit-sharing plan. The maximum future annual benefit toward which 2012 contributions can be made is generally $200,000.

Various caveats and limits apply, so contact us for details while there’s still time to set up a plan for 2012.

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Save More Tax With Donations of Appreciated Stock

mnarog on November 21, 2012

Publicly traded stock and other securities you’ve held more than one year are long-term capital gains property, which can make one of the best charitable gifts. Why? Because you can deduct the current fair market value and avoid the capital gains tax you’d pay if you sold the property.

Donations of long-term capital gains property are subject to tighter deduction limits — 30% of adjusted gross income (AGI) for gifts to public charities, 20% for gifts to nonoperating private foundations. In certain, although limited, circumstances it may be better to deduct your tax basis (generally the amount paid for the stock) rather than the fair market value, because it allows you to take advantage of the higher AGI limits that apply to donations of cash and ordinary-income property (such as stock held one year or less).

Don’t donate stock that’s worth less than your basis. Instead, sell the stock so you can deduct the loss and then donate the cash proceeds to charity.

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Projecting Income Can Allow Businesses to Use Timing to Their Tax Advantage

mnarog on November 14, 2012

By projecting your business’s income for this year and next you can determine how to time income and deductions to your advantage.

Typically, it’s better to defer tax. You can do so by:

  • Deferring income to next year. If your business uses the cash method of accounting, you can defer billing for your products or services. Or, if you use the accrual method, you can delay shipping products or delivering services. But don’t let tax considerations get in the way of making sound business decisions.
  • Accelerating deductible expenses into the current year. If you’re a cash-basis taxpayer, you may make a state estimated tax payment before Dec. 31, so you can deduct it this year rather than next. But consider the alternative minimum tax (AMT) consequences first. Both cash- and accrual-basis taxpayers can charge expenses on a credit card and deduct them in the year charged, regardless of when the credit card bill is paid.

In 2012, taking the opposite approach might be better. If it’s likely you’ll be in a higher tax bracket next year, accelerating income and deferring deductible expenses may save you more tax. And, because individual income tax rates are scheduled to go up in 2013, if your business structure is a flow-through entity, you may face higher rates even if your tax bracket remains the same.

Congress may, however, extend current tax rates for some or all taxpayers. Keep a close eye on Washington as year end approaches so you can adjust your timing strategy as needed if tax law changes do occur.

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With Election Results In, What's Next for Tax Law Changes?

mnarog on November 8, 2012

President Obama has been reelected, the Senate will remain in the hands of the Democrats (but without a filibuster-proof supermajority) and the House will continue to be controlled by the Republicans. In other words, the political makeup of Washington will be about the same in 2013 as it is now. As a result, it’s still very uncertain what will happen with tax law changes.

When it comes to tax law, Congress and the president have much to address, including tax breaks that expired at the end of 2011 as well as the rates and breaks that are scheduled to expire at the end of this year.

The “lame duck” session is scheduled to begin next week, but Congress will soon break again for Thanksgiving. How long it will be in session from after Thanksgiving through the end of the year is up in the air.

It’s still unclear what Congress will try to accomplish in the lame duck session — and what they’ll punt to next year. (In terms of the latter, tax law changes could be made retroactive.)

The lack of change in the political makeup of Washington could make it very difficult to pass tax legislation, considering how far apart the parties are on what should be done. Yet now that both parties know the outcome of the Nov. 6 elections, they may be more willing to compromise.

Whatever happens, it could have an impact on your year end tax planning. So keep an eye on Congress before implementing year end strategies.

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