Archive for August, 2012

Significant Tax Law Changes Are Possible in 2013

Thursday, August 23rd, 2012

 The exclusive purpose for the information which is provided from this website is to disseminate information, and not to provide tax advice.

 The information below was provided to me by the American Institute of Certified Public Accountants for distribution and dissemination to the clients of all CPAs.  While no attempt is being made to speculate on the final outcome from the 2012 election process, it is important that anyone who may possibly be affected by the outcome to understand the tax law changes which may occur in 2013 and be prepared to make the appropriate decisions after the November elections but before December 31, 2012. 

Dramatic tax increases are scheduled to go into effect in 2013.  If your tax liability will be adversely affected by these changes, you should consider proactive, decisive tax planning during the remainder of 2012. The following tax law changes and taxes may be impacted: 

  • Not only are the Bush Administration tax cuts set to expire, but a new 3.8 percent surtax on investment income and a possible reinstated claw-back of itemized deductions could raise the tax rate on ordinary income to as high as an effective 44.6 percent for some taxpayers.
  • Similarly, the tax rate on long-term capital gains could increase from 15 percent to 20 percent and the rate on qualified dividends from 15 percent to an effective 44.6 percent.
  • Finally, if Congress doesn’t take action, the federal estate tax rate will increase from 35 percent to 55 percent and the exclusion amount will drop from $5,120,000 to $1,000,000.

 There are alternative courses of action that are available to taxpayers in 2012 to offset or minimize the potential adverse financial impact from these tax laws.   The required planning for these likely tax changes is a major undertaking and many clients are beginning the process now rather than waiting for the fall elections.   This is prudent decision because the additional time will allow you to become comfortable with the gifting process and provide time to custom design trusts for your family.

 Gain “Harvesting”

For many taxpayers it will make sense to “harvest” capital gains in 2012 to take advantage of the current lower tax rates.  You would sell appreciated capital assets and immediately reinvest in the same or similar assets.  You would then hold the new assets until you would otherwise have sold them, so there would be no change in your investment strategy.

Deciding whether or not to use the strategy is not as simple as it might appear on the surface, however, because the lower tax rates must generally be weighed against a loss of tax deferral.  By “harvesting” the gains in 2012 you would be paying a lower tax rate, but recognizing the gains earlier. The greater the differential in tax rates and the shorter the time before the second sale the more favorable gain “harvesting” would be.

 In some cases, the correct decision will be clear without doing any analysis. If you are currently in the 0% long-term capital gains bracket, 2012 gain “harvesting” would always be favorable because it would give you a free basis step up. Gain “harvesting” would also be more favorable if you planned to sell the stock in 2013 or 2014 anyway. The time value of the tax deferral would be small compared with the future tax savings.

At the other extreme, if you are currently in the 15% long-term capital gain bracket and plan to die with an asset and pass it on to heirs with a stepped-up basis, there is no reason to recognize the gain now. You would be incurring tax now without any offsetting future benefit. Nor would it make sense to harvest losses to create additional capital loss carryovers. These loss carryovers would be better employed to offset capital gains in the future when rates are expected to be higher.

If you do not fall into one of these categories, you will have to do a quantitative analysis to determine whether 2012 gain “harvesting” would work for you. The decision could be thought of as buying a future tax savings by recognizing gain in 2012. By analyzing the decision in this way, you could measure a return on the 2012 investment over time. If this return on investment exceeded your opportunity cost of capital, gain “harvesting” would make sense. 

You should immediately contact your financial advisor, CPA, and estate planner to discuss your options and their recommendations.

Planning for the 3.8 Percent Medicare Surtax

For tax years beginning January 1, 2013, the new tax law change will impose a 3.8 percent surtax on certain passive investment income of individuals, trusts and estates. For individuals, the amount subject to the tax is the lesser of (1) net investment income (NII) or (2) the excess of a taxpayer’s modified adjusted gross income (MAGI) over an applicable threshold amount.

Net investment income includes dividends, rents, interest, passive activity income, capital gains, annuities and royalties. Specifically excluded from the definition of net investment income are self-employment income, income from an active trade or business, gain on the sale of an active interest in a partnership or S corporation, IRA or qualified plan distributions and income from charitable remainder trusts. MAGI is generally the amount you report on the last line of page 1, Form 1040.

 The applicable threshold amounts are shown below.

  1.  Married taxpayers filing jointly                             $250,000
  2. Married taxpayers filing separately                       $125,000
  3. All other individual taxpayers                               $200,000

 A simple example will illustrate how the surtax will be calculated.

Example. Al and Barb, married taxpayers filing separately, have $300,000 of salary income and $100,000 of NII. The amount subject to the surtax is the lesser of (1) NII ($100,000) or (2) the excess of their MAGI ($400,000) over the threshold amount ($400,000 -$250,000 = $150,000). Because NII is the smaller amount, it is the base on which the tax is calculated. Thus, the amount subject to the tax is $100,000 and the surtax payable is $3,800 (.038 x $100,000).

Fortunately, there are a number of effective strategies that can be used to reduce MAGI and or NII and reduce the base on which the surtax is paid. These include (1) Roth IRA conversions, (2) tax exempt bonds, (3) tax-deferred annuities, (4) life insurance, (5) rental real estate, (6) oil and gas investments, (7) timing estate and trust distributions, (8) charitable remainder trusts, (9) installment sales and maximizing above-the-line deductions. 

Accelerating Ordinary Income into 2012

A final opportunity that should be noted is accelerating ordinary income into 2012. Perhaps the best way to do this would be to convert a traditional IRA to a Roth IRA in 2012, if a conversion otherwise made sense. Ordinary income could also be accelerated by selling bonds with accrued interest in 2012 or selling and repurchasing bonds trading at a premium. Finally, you might consider exercising non-qualified stock options in 2012.

 Estate Tax Provisions

 The estate tax exemption is currently $5,120,000 per person and will revert to $1,000,000 on January 1st, 2013 unless Congress acts. The President is suggesting a $3,500,000 exemption. The potential reduction in the estate tax exemption is resulting in many client making large gifts, in trust, for their family. In some instances the trusts are for the spouse, children and grandchildren and in others just for children and younger generations. Most experts would define the savings at 35%, 45% or 55% of the amount gifted over $1,000,000. On a $5,000,000 gift the savings would be $1,800,000 ($4,000,000*45%).

Information For Recently Married Taxpayers

Friday, August 17th, 2012

The exclusive purpose for the information which is provided from this website is to disseminate information, and not to provide tax advice.

Tax Tips for Recently Married Taxpayers


If you’ve recently updated your status from single to married, you’re not alone – late spring and summertime is a popular period for weddings. Marriage also brings about some changes with your taxes. Here are several tips for newlyweds from the IRS.

  •   Notify the Social Security Administration  It’s important that your name and Social Security number match on your next tax return, so if you’ve taken on a new name, report the change to the Social Security Administration. File Form SS-5, Application for a Social Security Card. The form is available on SSA’s website at, by calling 800-772-1213, or visiting a local SSA office.
  •   Notify the IRS if you move  IRS Form 8822, Change of Address, is the official way to update the IRS of your address change. Download Form 8822 from or order it by calling 800-TAX-FORM
  •   Notify the U.S. Postal Service  To ensure your mail – including mail from the IRS – is forwarded to your new address, you’ll need to notify the U.S. Postal Service. Submit a forwarding request online at www.usps.comor visit your local post office.
  •   Notify your employer  Report your name and/or address change to your employer(s) to make sure you receive your Form W-2, Wage and Tax Statement, after the end of the year.
  •   Check your withholding  If you both work, keep in mind that you and your spouse’s combined income may move you into a higher tax bracket. You can use Publication 505, Tax Withholding and Estimated Tax, to help determine the correct amount of withholding for your marital status, and it will also help you complete a new Form W-4, Employee’s Withholding Allowance Certificate. Fill out and print Form W-4 online and give it to your employer(s) so the correct amount will be withheld from your pay.
  •   Select the right tax form  Choose your individual income tax form wisely because it can help save you money. Newlywed taxpayers may find that they now have enough deductions to itemize on their tax returns rather than taking the standard deduction. Itemized deductions must be claimed on a Form 1040, not a 1040A or 1040EZ.
  •   Choose the best filing status  A person’s marital status on Dec. 31 determines whether the person is considered married for that year for tax purposes. Tax law generally allows married couples to choose to file their federal income tax return either jointly or separately in any given year. Figuring the tax both ways can determine which filing status will result in the lowest tax, but filing jointly is usually more beneficial.

Bottom line: planning for your wedding may be over, but don’t forget about planning for the tax-related changes that marriage brings. More information about changing your name, address and income tax withholding is available on IRS forms and publications can be obtained from or by calling 800-TAX-FORM (800-829-3676).

To automatically receive IRS tax tips, visit, click on “News” and select “e-News Subscriptions.”


  • Form 8822, Change of Address (PDF)
  • Form W-4, Employee’s Withholding Allowance Certificate (PDF)
  • Publication 505, Tax Withholding and Estimated Tax (PDF)

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Are You Planning to Move This Year??

Wednesday, August 8th, 2012

The exclusive purpose for the information which is provided from this website is to disseminate information, and not to provide tax advice.

If you are planning to move from your present residence (even if you do not own it), some or all of the moving costs may have tax benefits for you IF you meet the requirements which are set forth in the related IRS publications.  This article provides information on this subject.  Additionally, you need to keep detailed, written records for all of your expenses and reimbursements.  These records will permit you to accurately complete your income tax return and support your return if any of the information in your tax return is questions by the Internal Revenue Service.   (more…)

Tax Tips If You Are Selling Your Home

Monday, August 6th, 2012

The exclusive purpose for the information which is provided from this website is to disseminate information, and not to provide tax advice.

If you are a homeowner, you will probably sell your home at some point in your lifetime.  This will happen in several circumstances – buying a larger home as your family grows, employer required move, voluntary move, retirement, downsizing, death, divorce, or separation, etc.    This is a reportable transaction insofar as the Internal Revenue Service is concerned.  You should also be prepared to provide written documentation for both your tax return and if your return is questioned by the IRS.    One of the most important documents which you will need is the Housing and Urban Development disclosure form which is often referred to simply as a “HUD-1”.  You will have received this document each time that you go through the closing process – when you originally purchased your home and when you sold it to someone else.   

A related article on this subject (“Are You Planning To Sell A Home?”) was published on this website on August 8th, 2011 (

The entity that was responsible for the closing for the sale of your previously owned residence (usually a title company, but in some states an attorney performs these tasks) will be providing the IRS with a Form 1099-S (“Proceeds From Real Estate Transactions”) which is an “information return” to provide the IRS with the dollar amount of the sale.  You will also receive a copy of this form.      Be sure that you complete all of the required blocks in the Schedule D (“Capital Gains & Losses”) worksheet of  your tax return for the year of the sale.  If you have met all of the requirements, some or all of the gain will be excluded from your capital gains, as provided by Section 121 of the Internal Revenue Code.  This information will appear in Section II (“Long Term Capital Gains and Losses – Assets Held More Than One year”) of Schedule D.  Losses on the sale of a personal residence are not deductible.    (more…)