Midyear may not seem like “tax season,” but now is an ideal time to assess your tax situation and to identify and implement appropriate planning strategies. Current federal tax law provides many opportunities for certain taxpayers to reduce their tax bills for 2012. However, a number of favorable measures are scheduled to expire at year- end, so careful planning for the balance of the year is prudent.

Start Planning Now
In light of certain potentially expiring tax provisions, planning ahead can be especially important if you expect to earn more income this year than last year. Furthermore, there may be certain income that you choose to accelerate into 2012 — as opposed to postponing to 2013 when tax rates may be significantly higher. It’s smart to prepare a taxable income projection for the year, including the income you expect to receive through the remainder of 2012 and the tax deductions that you may be entitled to claim. Once your taxable income for 2012 is projected, an estimate of your 2012 tax bill can be calculated using the current tax rate schedule. You can then compare that to an alternate scenario should certain taxable income be included in 2013, as opposed to 2012.

Consider Potentially Expiring Provisions
Many currently favorable federal tax provisions will expire at the end of 2012, absent further legislative actions. Changing provisions that may have an adverse impact on your 2013 tax liability include the following:

Individual tax rates. Current ordinary rates of 10%, 15%, 25%, 28%, 33%, and 35% may be increased to 15%, 28%, 31%, 36%, and 39.6%, beginning in 2013.

Long-term capital gains rates. In 2012, the maximum long-term capital gains rate is 15%. The maximum capital gains rate is scheduled to increase to 20% in 2013.

Qualified dividend rates. While qualified dividends are taxed at 15% in 2012, dividends are scheduled to be taxed as ordinary income beginning in 2013.

Payroll taxes. For the balance of 2012 only, employees pay a 4.2% Social Security tax rate on wages up to $110,100 (the 2012 Social Security Wage Base), as opposed to the normal 6.2% rate. Similarly, current law reduces the tax rate for the Social Security portion of self-employment tax on self-employment net earnings up to $110,100.

Accordingly, the maximum savings for employees and self-employed individuals in 2012 will be $2,202 (i.e., 2% of $110,100). For spouses who both earn at least as much as the Social Security Wage Base in 2012, the maximum savings will be $4,404.

The above Social Security/self-employment tax rates are scheduled to return to the full 6.2% in 2013. The resulting increased Social Security tax liability should be factored into your overall planning.

Personal exemptions and itemized deductions phaseouts. For 2012, no income-based phaseouts of these thresholds apply. Next year, prior law income limits will be restored, resulting in a lower amount of exemptions and itemized deductions that may be claimed by higher income individuals.

We Can Help

We can provide you with personal and business tax planning assistance — now or in the coming months. Call us, 1-800-269-6466 for an appointment to review your specific situation.

These potentially expiring provisions (and this is only a partial list; many other scheduled 2013 tax law changes may affect your overall tax liability) – and the likely resulting consequences – should be considered as tax planning steps are taken during the balance of 2012.

This entry was posted on Tuesday, June 26th, 2012 at 7:03 am and is filed under Accounting, Tax. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.