Tax Planning Must Focus on Being Informed, Prepared and Flexible– December 18, 2012 by Tracy Monroe

As the year wraps up, we find ourselves with a lame-duck Congress that may or may not successfully act on the fiscal situation before terms expire. We also have the expiring Bush tax cuts that will increase taxes on all levels at year end. Absent a change, higher earners will feel the pinch of higher tax rates; middle and lower earners may have to pay taxes for the first time in a while or be sideswiped by a significant alternative minimum tax (AMT) hit that has been patched over for some time.

The outlook is especially fuzzy and year-end tax planning must focus on being informed, prepared and flexible. While tax planning is never cookie cutter, with so many potential changes this year, communication with your tax professional and examining your specific situation will be more important than ever.

Some of the basic items we address in our Tax Planning Guide are outlined below. Incentives do exist, but are very dependent on circumstances.

Refundable AMT Credits
Through 2012, a refundable AMT credit applies to people with long-term unused AMT credits (at least four years old). It was enacted to provide relief to those who exercised ISOs and paid AMT in the dotcom days. The law allows taxpayers to claim 50% of their unused long-term AMT credits without AMT limitations.

Capital Gains/Losses
Through the end of 2012, taxpayers below the 25% tax bracket enjoy a zero percent tax rate on dividends and capital gains, providing opportunities to realign portfolios. In addition, excess losses can be carried forward indefinitely.

Estate & Gift Planning
The window is rapidly closing on the $5 million ($10 million for a married couple) estate, gift and generation-skipping tax exemptions. After 2012, the exemptions are scheduled to revert to $1 million. As a general planning rule, the weakened state of our economy creates a window to review estate and life insurance plans for unexpected opportunities.

Retirement Account Changes
The $100,000 Adjusted Gross Income limitation on Roth conversions was repealed in 2010, and moving forward anyone, regardless of income, can convert their traditional IRA into a Roth IRA. Now also may be a good time to consider making IRA contributions, review beneficiaries or roll inherited qualified plans into an inherited IRA as a tool to defer income tax.

Debt Relief
Individuals can exclude up to $2 million of mortgage debt forgiveness on a principal residence for indebtedness discharged on or after January 1, 2007 and before December 31, 2012. The relief is only related to acquisition debt and refinancing to the extent it does not exceed the refinanced debt.

Medicare Surcharge Taxes
Starting in 2013, high-income taxpayers will face two new taxes — 0.9% additional Medicare tax on wage and self-employment income in excess of $200,000 and a 3.8% Medicare contribution tax on net investment income. (see separate post).

Given the continued uncertainty, basic planning within the few areas known to be set is a good place to start.

Contact Tracy Monroe for additional information.

This communication is for information only, and any action should only be taken after a detailed review of the specific situation and appropriate consultation.

Notwithstanding that these materials do not constitute legal, accounting or other professional advice, as may be required by United States Treasury Regulations and IRS Circular 230, you should be advised that these materials are not intended or written to be used, and cannot be used by you or any other person, for the purpose of avoiding penalties that may be imposed under federal tax laws. No written statement contained in these materials may be used by any person to support the promotion or marketing of or to recommend any federal tax transaction(s) or matter(s) addressed in these materials, and any taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor with respect to any such federal tax transaction matter.