A client recently asked CPA Stuart Lyons whether accelerating income into 2012 would be beneficial. The client knows that tax rates are set to rise in 2013 unless Washington intervenes before the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) sunsets on December 31. The combination of higher taxes-plus new Medicare taxes-starting on January 1, 2013 means top earners in 2013 might pay as much as 43.4% on the margin on ordinary income versus this year's 35% top ordinary rate.  And the return of personal exemption phase-outs and the limitation on certain itemized deductions would ratchet the effective rate higher still.

But the political climate is so uncertain that even though conventional wisdom calls for advancing income into the current year before tax rates are set to rise, Lyons couldn't definitively give his client an answer.

Any talk about the demise of the Bush tax cuts may be premature. They came within a fortnight of expiring in 2010 before the Tax Relief Act provided a two-year extension.

The 2010 law also did something else: It shocked planners by including higher exemptions from estate and gift taxes.  A last-minute deal this year laden with out-of-the-blue provisions could negate the benefit of acting today.

Then there's that little contest on November 6.  Depending on the outcome of the presidential and Congressional races, the rules for 2013 could be different from today's picture of tomorrow.

The firm at which Lyons is tax principal, Baker Newman Noyes, in Portland, Maine, won't be skeleton-staffed this holiday season. "As a firm we are planning to be very busy right after the election, once we have a sense of where things may go, so that in December we'll be ready to roll during the lame-duck session" when new legislation could be enacted, Lyons says.

Accelerate Capital Gains
CPA Blake Christian has two clients currently negotiating business sales. "We're trying to close those deals by year end, if at all possible," says Christian, a tax partner at HCVT LLP in Long Beach, Calif.

For 2012 a 15% long-term capital gains rate applies to joint filers with taxable incomes (including their gains) above $70,700, or above $35,350 for singles.  At lower incomes, there is no gains tax this year.

Figure 1 reveals 2013 rates to be quite a bit higher. At the top end investment profits get slapped with an additional 3.8% Medicare tax. This surtax is new next year and it applies to the net investment income, including most capital gains, of joint filers earning above $250,000 and singles earning over $200,000.

In the case of Christian's clients, they could pay up to 23.8% in 2013 versus 15% in 2012. Hence, his urgency.

When you reposition the client's assets after taking gains, bear in mind that he could pay up to 43.4% on dividends next year by the time you include the Medicare surtax. That's quite a jump from 2012's 15% maximum rate for qualified dividends, a Bush-era categorization that's about to expire. When it does, dividend income will be ordinary income.

The need for tax-efficient investing (and advising) increases with the advent of the 3.8% surtax, notes CPA Robert S. Keebler, founding partner of Keebler & Associates LLP, in Green Bay, Wis. Clients in this year's 0% long-term gains bracket should consider recognizing tax-free gains.  Immediately repurchasing investments they still love establishes a higher basis in the position, which lowers the gain to be realized when the asset is sold down the road.

Entrepreneurs can similarly save potentially higher taxes tomorrow with a conversion of their C corporation to an S corporation or a limited liability company this year. In addition to paying 2012's 15% maximum rate on the dividend distributions and long-term capital gains conversion triggers, any gain recognized increases the owner's basis in the business, producing a lower profit on a subsequent sale, Christian explains.

Another strategy for a rising-tax-rate environment is to eschew techniques that defer gains to the future. A prime example is an installment sale.

Real estate investors might forgo tax-deferred 1031 exchanges and instead report gains in 2012. In addition to this year's attractive tax rates, paying the tax now provides larger depreciation deductions on the investor's next property than a 1031 would, Christian says.

Write-offs are more valuable after rates rise because each dollar deducted saves more tax.

Deduction Planning
Certain deductions, however, may be better pursued this year, even ignoring time value of money considerations.

Itemized charitable contributions and mortgage interest, along with state and local income and property taxes and miscellaneous itemized deductions, are curtailed by the so-called Pease limitation, which resurrects with EGTRRA's death.
That argues for advancing these expenses into 2012 to the extent possible, assuming the client isn't thrown into an alternative minimum tax situation as a result.
Medical expenses, which are never easy to deduct, may also be worth accelerating into 2012, says Leon LaBrecque, CEO of LJPR LLC, an independent wealth advisory in Troy, Mich.

Beginning in 2013, clients younger than 65 who are not subject to AMT will only be able to itemize unreimbursed medical expenses when they exceed 10% of adjusted gross income (AGI), up from 7.5% currently. Older non-AMT taxpayers, including joint filers with at least one spouse age 65 in 2013, will continue to use 7.5%.

AMT taxpayers will likewise see no change in their threshold.  It is presently 10% and remains so next year.

Clients close to breaching the threshold this year might accelerate dental work or elective surgery, or purchase eyeglasses or contact lenses. And, LaBrecque says, remind clients that expenses charged on a credit card in 2012 are deductible in 2012.

Business owners can write-off half the cost of new equipment they purchase with 50% bonus depreciation.  This generous deduction can be used to create a tax loss for the year, Christian points out. "Then carry back the loss to prior years to get refunds of taxes that the client paid.  We are doing some of that," he says.
Bonus depreciation is not available in 2013.

Patch Worn Out
As of this writing, the 2012 exemption from alternative minimum tax is $45,000 for joint filers and $33,750 for singles. Forecasts call for a seven-and-a-half fold increase in the number of taxpayers subject to the tax this year.

But that's been the story for several years running, hasn't it? Congress has perennially bandaged the problem with a higher, but temporary, exemption, usually at the 11th hour. We're not there yet.

"If you can't avoid AMT, you may want to embrace it and take more ordinary income," Christian says. "The top marginal rate under AMT is currently only 28%," which is lower than the top two ordinary brackets. He says he's helping AMT clients decide whether to accelerate into 2012 the exercise of their stock options-among other things-to take advantage of AMT's 28% rate.

The "How Many Million Dollars?" Question
Gifting opportunities presently abound. But the clock is ticking with a vengeance.

The end of EGTRRA would slash the per-person gift tax exemption from $5.12 million to a modest $1 million, while simultaneously raising the tax on transfers above the exemption to 55%, up from the current 35%.

Clients shouldn't gift assets they are likely to need later, of course-call it means testing for the high-net-worth crowd. "We have a real estate investor with properties they weren't counting on for living expenses," says John Przybylski, director of financial planning at Boston-based Federal Street Advisors. "Those are the assets they are giving to their children."

Many of his clients who can afford to gift are utilizing grantor retained annuity trusts and other vehicles that benefit from valuation discounts. These planning tools are not slated to end in 2013, but they are frequently in Washington's crosshairs.

Clients contemplating making gifts in 2012 should get moving soon because trusts and estates attorneys are already busy and may not be available at the last moment to help dillydalliers.

"As clients transfer wealth, this is an opportune time to start helping them set in place governance structures that enable younger generations to learn the skills and values necessary for success in handling wealth," Przybylski says.

Like the gift-tax-free amount, the estate tax exemption is scheduled to fall to $1 million on January 1, 2013. But that figure is lower than either presidential candidate advocates. President Obama has proposed a $3.5 million exemption, while Romney wants to eliminate the death tax altogether.

Could this be anymore unsettled?

"Just about anything can happen," says Steve Oshins, an estate planning attorney and partner in Oshins & Associates LLC, in Las Vegas. "We learned with the 2010 Tax Relief Act that the transfer tax is really just a pawn that can be thrown in by either side to get a much larger deal done."

Oshins advises assuming a $1 million exemption when deciding how much life insurance to buy to cover death taxes.  If the exemption is higher when the client passes and the policy proceeds surpass the tax due, the family nets a windfall.

On a final note, some good news for small business owners: Employers who filed fewer than 250 Forms W-2 for 2011 wages are exempt from reporting employer-paid health-care costs on next spring's W-2s. Find recent IRS guidance at www.irs.gov/uac/Employer-Provided-Health-Coverage-Informational-Reporting-Requirements:-Questions-and-Answers.