A few mid-year tax planning ideas for individuals

With one more tax season behind us and still a few months until the the October 15th extension deadline, it is probably a good time to start the discussions of what will encompass our writing through the end of this year and into next.

As most everyone is aware, the “Bush Tax Cuts” are set to expire at the end of 2012. With the economy mending slowly, Presidential elections in November and the Federal Reserve holding off on further economic stimulus, President Obama appears less likely to agree to an extension of tax cuts for the wealthy as he did in 2010. The Republicans have shown no signs of agreeing to anything less than an extension of the Bush tax cuts for everyone. Also, with the current deficit letting all the Bush tax cuts expire, perhaps on a phased-in schedule, might be the best course.

With all that said, the only thing for certain is that we have no idea how this will play out through the remainder of the year. I think we need to be prudent to take advantage of what tax provisions apply currently to hedge our bets against higher taxes starting in 2013. Given Congress’ propensity for late-year decisions on these matters, especially during a presidential election year, we need to prepare several contingency plans. There may be little time for us to execute these plans in late 2012, after Congress decides.

Here are some things you may want to consider at this time:


With 2012 being perhaps the lowest tax rates we will see in a while, Roth conversions should be on the agenda as well. While Congress is talking a great deal about lowering tax rates, the deficit realities may limit what is actually doable in that regard. A Roth conversion in 2012 would ensure taxation at 2012 tax rates and make further accumulations in the Roth account tax-free in the future.


Current maximum capital gain rates of 15 percent would rise to 20 percent in 2013 under current law. Realizing those gains in 2012 would ensure taxation at the current rates. Investors can even immediately repurchase the investments that they desire to hold for a longer period and still recognize the gain in 2012.

Also, if the current law expires, dividends would once again be taxed as ordinary income.  This may force some companies sitting on cash to pay out a special dividend before 2013.


One option being discussed as a way to avoid the increased Medicare taxes on net investment income (see last months blog post) is to shift more investments to tax-exempt bonds. Tax-exempt bonds generally offer a lower return, and an investment portfolio too heavily weighted in such bonds probably does not offer sufficient diversity, but it is one move to avoid the increased taxes on taxable investments.


The current unified gift and estate tax exclusion of $5 million (actually $5,120,000 for 2012) will revert to $1 million in 2013 under current law. The maximum tax rate will also go from 35 percent to 55 percent. Taxpayers should consider accelerating gifts to take advantage of the current high exclusion amounts.


In more stable tax environments we try to postpone income and accelerate deductions. In an environment of anticipated higher rates in the following year, 2012 is a year to consider the opposite strategy. Accelerate income to get it taxed at the lower rates of 2012, and postpone deductions so they can offset income in 2013 that would otherwise be taxed at a higher rate than 2012 income.


One of the regularly expiring provisions that also expired at the end of 2011 was the increased Alternative Minimum Tax exemption amount. More than 25 million taxpayers would be caught by the AMT in 2012 if Congress extend the exemption amount. Congress is very likely to extend the exemption amount again. If you are could be  caught by the AMT in 2012, there are a variety of tax breaks that you may be accustomed to claiming that would not be available to you in 2012. It is important to understand those items and postpone the payment of those expenses until after the elections or Congress acts.


2012 will continue to be a year of considerable tax uncertainty that will make planning difficult. With the growing list of regularly expiring provisions, almost every year becomes more difficult to plan for. In 2012, with the Bush tax cuts expiring, we will continue to develop strategies for our clients to hedge against this uncertainty.

We also need to consider the new Medicare taxes taking effect in 2013, also made somewhat uncertain by the Supreme Court’s consideration this year of the enforceability of those taxes as part of its review of the constitutionality of the health care reform legislation.

We think it is wise to wait until after the November elections to view what 2013 is likely to bring. However, we need to have the plan laid out and actionable if Congress delays its final decision as it has in the past. Please pay particular attention to our blog posts as the year progresses to insure that you are armed with as much information as possible in making these tax planning decisions.

If you have any questions regarding the future direction of the law or how to plan for these uncertainties, please do not hesitate to contact us.

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