May 11, 2012

Effective Tax Planning Starts Early

By Jacob Sparks, Staff, Tax Services

Effective Tax Planning Starts Early

Do you wonder if you have adopted the most effective tax planning strategies, or just the most convenient? Now that the most recent tax deadline has passed, it is time to start planning for the future.It may seem like you have just finished thinking about your taxes for the year, but actually, now is the time to start the tax planning process.

There are many strategies to help reduce your future tax liabilities, such as the creation of a family limited partnership, the creation of certain trusts, and gifts to family members to name a few.However, not all strategies are effective for every taxpayer.According to experts, on average it takes about 60 days to properly educate yourself about a legitimate tax planning opportunity; 60 days to determine that effectiveness of the opportunity; and 60 days to implement the plan once you have decided it will be effective. Since December can be a wasted month due to holidays and year-end vacations, you should start planning no later than now.
Tax planning opportunities come in all shapes and sizes.Some are created merely by changes in the tax law, with no action required on your part but to identify the most advantageous position.Other planning opportunities arise through the identification and implementation of tax vehicles, such as trusts.Below is a list of a few of the tax planning opportunities that you should consider:

  • Estate tax rate and exemption – Understanding how much wealth can be transferred tax free is important. Under current law the estate tax rate will increase in 2013 to 45% up 10% from the 2012 rate of 35%. In addition, the lifetime exemption amount will decrease to $1,000,000 down from the 2012 exemption amount of $5,120,000.
  • Capital gains tax – If you are planning the sale of a business, real estate, or an interest in a partnership or corporation, start planning early.There are several ways that capital gains can be eliminated, reduced, or shielded, but only with sufficient planning.Also, 2012 may be the year to sell, considering the proposed rate increases.
  • The Bush tax cuts -Under current law the Bush tax cuts will expire at the end of 2012. If there is no change in current law, effective January 1, 2013, the top marginal tax rate will increase to 39.6%. Long-term capital gains will be taxed at a maximum rate of 20%. Dividends will be taxed as ordinary income. In addition, limits on personal exemptions and itemized deductions will be restored to Clinton era levels.
  • AMT Patch – The current Alternative Minimum Tax (AMT) law, temporarily increasing the AMT exemption amount has expired. Barring another temporary increase in the exemption, the 2012 exemption amounts are reduced to $45,000 for married couples and $33,750 for unmarried individuals.Under current law an estimated 30 million taxpayers, previously not affected by AMT, will be subject to this tax in 2012. Planning to avoid this tax may include income acceleration or deferral, as well as careful consideration of the timing of certain deductions such as state taxes which are not deductible in the calculation of AMT.

These are only some of the major changes in the tax law that could have an effect on you in the near future.You should be proactive in your own tax planning, as your tax professional may not always be as aware of your personal financial situation as you.Please speak with your tax professional to determine how changes in the tax laws will affect you and what you can do to reduce your future tax liability.