As the end of the year approaches, financial and tax planning remains complex. Both tax and interest rates remain at historical lows and opportunities for income and estate tax planning remain plentiful, even in an uncertain economy and with the prospects of increased taxes due to the so-called “fiscal cliff” approaching in early 2013. You should use these last few weeks of 2012 to review your financial picture and consider strategies to maximize your financial picture. As with all tax strategies, it is essential to engage a tax professional before taking final action.

Impact of the election: With the close November election and the continuation of divided government, prospects for comprehensive tax reform, and even more limited tax legislation before the end of 2012 remain unclear. Congress needs to address certain issues, such as the “Alternative Minimum Tax Patch” (discussed below), before year-end to prevent a chaotic 2012 tax filing season. Other tax provisions, including the extension of the so-called “Bush Tax Cuts” and payroll tax relief will expire as of December 31, 2012 and it remains to be seen whether a Republican-controlled House of Representatives, a Democratic-controlled Senate and the Obama Administration can reach agreement on these issues.

Shift income and deductions where possible: does this make sense this year? Tried and true year-end tax strategies generally revolve around shifting some tax burden to next year. Deferring receipt of a bonus payment to 2013 or accelerating deductions into 2012  through prepaying a deductible expense or making  larger charitable gifts or can lower this year’s bill, leaving those saved tax dollars in your pocket rather than the government’s. For 2012 there are several complicating factors that must be considered as you discuss potential year-end moves with your tax advisor including:

• Because the Bush Tax Cuts expire at the end of the year, all tax rates revert back to their pre-2001 and 2003 levels, resulting in higher taxes in 2013, including a top tax rate of 39.6 percent. The Obama Administration has pledged to retain the existing lower tax rates for those with adjusted gross income under $200,000 and married couples with adjusted gross income under $250,000). Also, provisions that would limit the value of personal exemptions and a percentage of itemized deductions return to the tax code. Again, the Obama Administration would only apply these increases to those with incomes over the $200,000 and $250,000 levels. Higher tax rates in 2013 must be considered.
• Second, income tax planning should take into account the impact of the Alternative Minimum Tax (“AMT”) The so-called AMT Patch, that increases the amount of income exempt from the AMT, expired at the end of 2011 and needs to re-enacted before the end of 2012 if Congress wants to lower the AMT tax bills of many taxpayers as well as prevent almost 30 million new taxpayers from paying the AMT tax for the first time. Remember that those with large state tax deductions, long-term capital gains, a large number of dependents, or exercised stock options are among those most prone to AMT exposure. This is an area where skilled tax advice is absolutely essential.
• Third, “high-income taxpayers,” defined again as those with adjusted gross income in excess of $200,000 (single) and $250,000 (married), face two new taxes in 2013 enacted to help pay for the Affordable Care Act (“ObamaCare”). In general, an additional 3.8 percent Medicare tax will be imposed on investment income, such as capital gains, in excess of these threshold amounts ($200,000/$250,000) starting in 2013. Further, an additional 0.9 percent tax will be imposed on wage income above these thresholds. This will be in addition to the existing 1.45 percent Medicare tax currently in the law. Because of the increasing complexity caused by the combination of all of these changes, it is vital to figure both your regular and AMT tax before executing any year-end tax strategies.

Impact of proposed legislation and capital gains: If the Bush Tax Cuts are not extended, the top tax rate for long-term capital gains increases from 15 percent to 23.8 percent (20 percent statutory rate and the additional Medicare tax) and the top tax rate for dividends increases from 15 percent to 43.4 percent. It is probably safe to say that the top rates for investment income will never be lower than 2012 rates. You may not have much control regarding the timing of when you receive dividends, but you may want to cash-in long-term gains such as stocks or other assets whose value has increased over the last several years. There may be other strategies to consider including gifting of appreciated assets such as stock to charities in order to maximize tax savings and the impact of your charitable gift. Remember: “the tax tail should not wag the investment dog,” and you need to discuss any transactions with your financial advisor or broker.

Estate and Gift Strategies to Consider: Another portion of the tax code expiring at the end of the year is the current estate and gift tax regime that provides a $5.12 million exemption from transfer tax and would return to $1 million. In some circumstances, you may want to consider making large gifts or transferring appreciated property to intended beneficiaries before year-end. Other gifting and estate planning strategies to consider include gifts in trust, and other more complex transfer transactions such as use of life insurance trusts, grantor retained annuity trusts among others. Both your tax advisor and planned giving professional can help here.

Charitable Giving at Year-end: Accelerating or increasing charitable contributions at year-end is among the most effective planning strategy to reduce your tax liability and get needed financial support into the hands of your favorite charity sooner. Some year-end points to remember: (1) gifts by check are considered complete this year as long as dated and mailed by December 31, even if the charity doesn’t cash the check until January, 2013; (2) pledges and other obligations cannot be deducted unless actually satisfied by December 31; and (3) gifts of appreciated property that would produce long-term capital gains directly to a charity generally provide a bigger tax savings than selling the asset. However, in cases where the value of the stock remains below your cost basis, it most likely makes sense to sell the stock first, recognizing the tax loss, and then gift the proceeds to charity.

Giving Techniques and Interest Rates: A number of other techniques deserve special consideration during as interest rates remain low.  A charitable lead trust, a planning vehicle where the trust pays income to a charity for a period of years and subsequently transfers the trust property to other including family members, can provide a current charitable gift as well as reduced federal transfer tax. Grantor retained annuity trusts should also be considered to shift appreciating assets to others free of gift tax. Intra-family loans to children or family members can also be attractive when IRS interest rates are likely to be lower than commercial interest rates.

IRA Charitable Rollover Not Yet Available for 2012: Over the past six years, many individuals over age 70 ½ have utilized the IRA charitable rollover to transfer funds from their retirement accounts directly to public charities. Unfortunately, as this is being written, the IRA charitable rollover is not available for 2012. JFNA continues to lead a coalition of national charities working to restore it retroactively to cover qualified transfers from IRAs during 2012.

The Federation can help you maximize your gift to the Jewish people: Federation endowment professionals remain available to work with your tax advisors to maximize the benefits of these and other tax planning strategies for you. In turn, you and your tax advisor can work with the Federation to maximize your gift to the Jewish community. For more information, contact Debbi Grinstein, Endowment Director, at 330-746-3250 x 175.