NEW YORK, NY — (Marketwire) — 12/11/12 — The smart money will get ready for the year-end tax deadline by turning conventional wisdom on its head, accelerating income into 2012 and deferring deductions into 2013, according to partners at New York accounting firm
“While the -fiscal cliff- debate is in progress and we don-t know where tax rates will ultimately be set, it-s a safe assumption that tax rates for high net-worth individuals will be higher in 2013 than in 2012,” says
“That means that anything you earn in 2012 — including capital gains — will be taxed at a lower rate than next year. Under those circumstances, it makes sense to consider accelerating income. On the other hand, deductions could be worth more next year, since they will offset a higher rate of taxation (unless deductions are limited).
“In other words, the smartest move may be to do the opposite of conventional wisdom,” Mr. Eliach says. “It has been standard at year-end to reduce the amount of taxable income by deferring income into the next calendar year and accelerating deductible expenses. In 2012, it may be better to do the opposite — aim for higher income in 2012 and possibly higher deductibility in 2013. However, there is talk about limiting deductions in 2013.”
Here are some of the “smart moves” that MP&S partners are recommending for high net-worth individuals as the end of the calendar year approaches:
“If Congress takes no action, the highest federal income tax rate will reset automatically to 39.6 percent,” Mr. Eliach says. “Even if that does not happen, an increase is likely. Consensus is that rates on personal income will go up three, four or five percent,” Mr. Eliach says. “$100,000 in income is likely to cost you an additional $5,000 in taxes in 2013.”
“Not all taxpayers have the ability to accelerate income,” Mr. Eliach explains. “For wage earners, it can be difficult. But for example, a contractor or consultant may be able to accelerate payments in December. Even wage earners have some options — if you-re due for a bonus in January, ask if you can have it in December. As for expenses, it might be a good idea to put them off until 2013, when they will be more valuable given higher tax rates.”
“There will likely be a three- to five percent increase in capital gains tax rates and reductions in bonus depreciation, as well as severe limits on tax-free gifting, including, probably, the end of the $5,120,000 per person gift tax exemption,” says . “It-s also important to keep in mind the additional 3.8 percent Medicare tax on investment income.”
“Unlike decades ago, we-re now in a near-zero interest rate environment,” Mr. Eliach says. “That means that if you hang onto your money, it won-t earn very much for you. At half a percentage point interest, if you invest $100,000, you-ll earn $500. Contrast that to the late 1970-s, when an interest rate of 16 percent meant that you-d earn $16,000 on the same amount. As a result, accelerating the tax at a lower rate makes sense.”
“If you are planning to realize a capital gain in the first quarter of 2013, you might want to think about moving the sale forward into December,” Mr. Eliach says. “But if the investment was one you were planning to hold for a decade, then you might want to keep it. We don-t know where interest rates are going to go long term, and a ten-year investment at a blended rate could easily out-earn what you-d otherwise save in capital gains taxes. Your personal financial plan, developed with a financial adviser, should come first.”
“Prepaying state and local taxes can trigger the AMT,” Mr. Jennings says. “This is especially true for taxpayers who live or own property in high tax jurisdictions like New York or California. But if tax rates in general are higher in 2013, fewer people will be subject to the AMT. They-ll pay regular tax-table rates instead. If they do, they can continue to deduct state and local taxes. So by not pre-paying your state and local tax, you get a benefit — you can avoid the AMT in 2012, and you can take your deduction next year for your state and local tax payments. People will pay higher rates, but many of those people would otherwise have paid a similarly high amount under AMT. They-ll go from paying a high AMT to paying a high tax-table rate, and the difference might be minimal.”
“These tax strategies may apply to a wide range of individuals,” Mr. Jennings says. “Particularly in high-income, high-tax areas like New York, it wouldn-t be surprising to see a two-career couple winding up in a top tax bracket and having to think through some of these issues.”
“Obviously, tax strategies are highly individual, and a tax professional can only give advice based on specific knowledge of an individual-s tax and financial picture,” Mr. Eliach says. “But in general, it-s best to plan for higher rates. Taxpayers should factor in the probability of higher rates and discuss the implications with their tax adviser.”
Marks Paneth & Shron LLP is an accounting firm with nearly 475 people, of whom approximately 60 are partners and principals. The firm provides businesses with a full range of auditing, accounting, tax, consulting, bankruptcy and restructuring services as well as litigation and corporate financial advisory services to domestic and international clients. The firm also specializes in providing tax advisory and consulting for high-net-worth individuals and their families, as well as a wide range of services for international, real estate, media, entertainment, nonprofit, professional and financial services, and energy clients. The firm has a strong track record supporting emerging growth companies, entrepreneurs, business owners and investors as they navigate the business life cycle.
The firm-s subsidiary, Tailored Technologies, LLC, provides information technology consulting services. In addition, its membership in Morison International, a leading international association for independent business advisers, financial consulting and accounting firms, facilitates service delivery to clients throughout the United States and around the world. Marks Paneth & Shron LLP, whose origins date back to 1907, is the 32nd largest accounting firm in the nation and the 16th largest in the New York area. In addition, readers of the New York Law Journal rank MP&S as one of the area-s top forensic accounting firms for the third year in a row.
Its headquarters are in Manhattan. Additional offices are in Westchester, Long Island and the Cayman Islands. For more information, please visit .
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