1. ‘Tis the Season… To Reduce Your Tax Burden

    It’s that time of year again. Gift-giving, last-minute spending, and a whole lot of other activities intended to help individuals reduce their tax burden in the coming year.

    But this time it’s different. On December 31, 2012 – the date known affectionately as “Taxmageddon” – a broad number of tax law changes go into effect. From law firm Duane Morris:

    “Not only are there expiring provisions, including the Bush tax cuts, but there are also provisions that already expired last year that may or may not be retroactively reinstated and more than 20 new taxes under the Patient Protection and Affordable Care Act (commonly called Obamacare), which may or may not be repealed in whole or in part. As a result of unprecedented levels of uncertainty, the complexity of tax law for 2012 has wreaked havoc and will continue to do so on year-end and beyond tax planning… For example:

    1. The Bush-Era tax cuts sunset (which means expire), which will cause a substantial increase in tax rates effective January 1, 2013.

    2. Last year’s temporary payroll tax cuts that provided a 2% tax decrease for workers will end.

    3. A number of tax breaks for businesses will end.

    4. The alternative minimum tax (AMT) rears its ugly head and is expected to increase tax for about 30 million taxpayers.

    5. Taxes increase as a result of President Obama’s healthcare law.”

    What can you do to ease the pain? For starters: 

    1. Give away what you can:

    “[M]aking gifts before the end of 2012 may provide significant transfer tax savings. In addition to the reduced rate, it is always cheaper to make lifetime gifts rather than making gifts at death. This result occurs because you do not pay a tax on the dollars used to pay gift tax, but you do pay estate tax on the dollars used to pay estate tax. The benefit is compounded further by the lower gift tax in 2012.” (Katten Muchin Rosenman) 

    2. Record capital gains in 2012:

    “If you are already thinking of selling assets that are likely to yield large gains because of a low cost basis, try to make the sale before year-end (considering market conditions).  The 2012 long-term capital gains rate ia a maximum of 15%, but it’s scheduled to rise to 20% in 2013. Also, if your adjusted gross income exceeds certain limits $250,000 for joint filers/$125,000 for a married individual filing a separate return/$200,000 for a single person, gains in 2013 might trigger an extra 3.8% tax (the so-called ‘unearned income Medicare contribution tax’).” (Fein, Such, Kahn & Shepard) 

    3. Consider converting your IRA:

    “If your traditional IRA is (or was) loaded with equities and has yet to fully recover from the beating taken during the 2008–2009 stock market meltdown, the tax hit from converting your traditional IRA into a Roth IRA now will likely be less than it would have been at the market peak. This is because a Roth conversion is treated as a taxable liquidation of your traditional IRA, followed by a nondeductible contribution to the new Roth IRA. While even the reduced tax hit from converting may be unwelcome, it may be a small price to pay for future tax savings.” (Duane Morris) 

    4. Set up a trust:

    “An individual making substantial gifts often wishes to put some restrictions or limitations on the family members’ access to the property. Trusts are flexible instruments that can be established to hold the property for the benefit of family members while providing restrictions on the use or expenditure of those assets. In addition, gifts in trust may allow the individual to use his or her GST exemption to transfer assets on a multi-generational basis with no transfer tax.” (Womble Carlyle) 

    5. Prepay education expenses:

    “One of the expiring tax incentives is a tax credit called the American Opportunity Tax Credit. Taxpayers should consider whether education expenses subject to the AOTC credit may be pre-paid in 2012 in order to qualify such expenses for the AOTC credit before its expiration.” (Jackson Walker) 

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    The updates:

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