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.