Did You Say Accelerate My Income? Part II by Carolyn Flaherty

On May 10^th I published an article on accelerating income. The article discusses some of the provisions that are due to “sunset” as of January 1, 2013 and what their impact will be. As promised, if you anticipate being affected (and there are few people who would not be), here are some suggestions to discuss with your accountant.
Those whose tax rate will increase due to marginal tax rate changes should explore accelerating income to 2012 and/or deferring deductions to 2013. Some ways to do this would be to bill clients earlier, sell appreciated property, avoid installment sales that defer gain, and accelerate bonuses.

Considering charitable contributions? If you are planning to give to charity toward the end of 2012, you may want to defer and contribute in January 2013 when tax rates are higher.

Note also that if tax rates do indeed increase, pre-paying the annual property bills at year end will not be advantageous in 2012.

Furthermore, individuals should review their withholding rate or consider larger estimated tax payments starting in 2013. Married couples and taxpayers with qualifying dependent children should pay particular attention as the child tax credit is slated to revert to $500 per qualifying child and the Marriage Relief Penalty may not be renewed.

If your portfolio includes appreciated capital property, 2012 is a good year to sell. Maximum capital gains rates are slated to jump from 15% to 20% in 2013. As long as the sale is bona fide and the proceeds are received in 2012 you will obtain considerable tax advantage. However, you cannot sell and then immediately after re-acquire without invoking the wash sales rules.
Corporations may want to explore declaring a special dividend before January 1, 2013 to get cash out of the company while it is still taxable to shareholders at the reduced rates. As of January 2013, all dividends will be taxed at the applicable ordinary income tax rates unless legislation is passed.

As advisors, we find it very hard to direct clients during uncertain times such as these. There is always the possibility that some or all of the tax relief provisions will be extended. In which case, the planning and speculation is null and void. Therefore, don’t rush out and sell off your portfolio. However, you should consult your advisor and consider some “what if” scenarios. As year-end approaches, the tax landscape will become clear and if you have a plan in place, you will be able to execute it effectively. Without a plan, you just may end up in a difficult tax situation in 2013.