With the tax season at an end, some taxpayers are already considering ways to lower taxes in the future. While it’s too late to change 2011 taxes, it’s the perfect time to make plans for actions in 2012.

As it stands now, when 2013 arrives, taxes are going up. The tax cuts created by President George W. Bush expire this year, and brackets return to the previous rates of up to 39.6 percent in 2013 from 35 percent now.

Taxpayers at all income levels will be affected. The 10 percent bracket disappears, and 15 percent becomes the lowest tax bracket. In addition, the child tax credit expires, and capital gains rates return to 20 percent from zero to 15 percent this year.

Continued Congressional gridlock and an unknown election outcome in November make it important to plan now to head off the potential tax hike. Some possible actions to consider are:

•  Convert traditional IRAs to Roth IRAs.  While this decision is based on each individual’s situation, those who are considering converting might want to act this year. Conversions are considered ordinary income, so they will be taxed at an individual’s current tax rate. For the wealthy, it would be better to be taxed at 35 percent instead of 39.6 percent.
• Take income earlier.  If you are able to control when income is received, taking it in 2012 could result in it being taxed at a lower rate.
• Sell profitable investments.  If the capital-gains tax is headed to 20 percent in 2013, some individuals might want to consider cashing in gains at 15 percent this year.
• Reduce dividends.  If qualified dividends become taxed at the taxpayer’s tax rate in 2013 instead of zero to 15 percent now, some individuals might want to rebalance their portfolio to put investments that pay no or lower dividends in their taxable accounts and higher dividend investments in tax-deferred accounts.

On top of this, investment income would be taxed an additional 3.8 percent next year for those with incomes over $200,000 or $250,000 for married filing jointly. This includes interest, dividends, capital gains and rents. The tax is part of the health-care reform plan Continued Congressional to help the Medicare program.

If you’re serious about seeking ways to reduce your tax liability during 2012, then you will want to consider these opportunities: InvestOhio, the gift-tax exemption and accelerated depreciation on capital expenditures.

• InvestOhio. Many owner/operators in Ohio are engaged in major remodeling programs (MRPs) and rebuilds during 2012. The State of Ohio is offering a unique opportunity this year for small businesses to invest personal cash into their S-corporation, LLC or partnership for specific purposes and gain a tax credit through the new InvestOhio program. The bottom line is that an owner/operator in Ohio may be able to qualify for a 10 percent Ohio tax credit if capital is infused into his or her restaurant’s S-corporation, LLC or partnership. The program opened in December and already $40 million, 40 percent of the total tax credit pool, has been allocated.
• Gift Tax Exemption. The $5 million gift tax exemption is set to expire on December 31, 2012, so this year presents an opportunity to make tax-free transfers of a portion of your equity in your restaurant’s operating company to the next generation candidates in your family. We cannot stress enough the importance of acting on this opportunity now. Using this exemption could significantly reduce your family’s future estate tax burden.
• Accelerated Depreciation. 2011 was a tremendous year for being able to quickly depreciate capital expenditures. Opportunities for accelerated depreciation in 2012 are not as good as 2011, but they are still very favorable. If you have capital expenditures of under $500,000 in 2012, $125,000 of qualifying capital expenditures can be expensed immediately per Section 179 in 2012. Bonus depreciation is still in play for 2012, but the percentage is now only 50 percent, compared with 100 percent in 2011.

If you would like more information or assistance in determining how these opportunities might apply to your situation, contact Whalen & Company, CPAs and Consultants.