[caption id="attachment_46930" align="alignright" width="216" caption="Joseph Kitts, Adam Holtzman"][/caption]
NORTH BAY – A number of favorable tax provisions for top income earners will expire at the end of 2012, and tax professionals in the North Bay said that careful income planning and asset evaluation could allow some individuals to take advantage of current rates and lessen the impact of increased taxes in 2013.
Those increases span a number of areas, including taxes on net investment income, estate tax exemptions and the top margin tax rate on regular income. It is likely that many won’t notice when rates go up in 2013, but the combined effect stands to have impact many business owners and high-net-worth individuals.
“When you start adding all those income tax rates up, you may have even a 45 percent rate,” said Joseph Kitts, tax partner at the Santa Rosa office of Burr Pilger Mayer (BPM), after listing several income and estate tax provisions expected to change next year. “2012 becomes kind of an opportunity for not only estate planning, but income tax planning – particularly for the wealthy.”
Many agree that Congress, under the pressure of ballooning deficits, is unlikely to extend tax breaks for high-income earners beyond 2012. The irony of that news, said Mr. Kitts, is the benefit of relative certainty: with the legislative gridlock that typically accompanies an election year, those provisions are likely to expire as planned.
Tax reform in Congress is still possible, a risk that Senior Tax Professional Adam Holtzman of Ghirardo CPA said is always an issue in tax planning. However, many are planning around the expected provisions, particularly for the near term.
“I think that many people are convinced that rates are going to have to increase in the future in order to deal with skyrocketing government debt at both the federal and state levels, but nobody knows where things will stand 10 or 20 years from now,” Mr. Holtzman said.
For those who are able, choosing to accelerate income like the sale of a major asset into 2012, as well as a deliberate approach to deductions, could result in net tax savings amid the expected increases.
“What may be right might not be intuitive,” Mr. Kitts said, noting that the common tax wisdom is to defer income and accelerate deductions. “Those people who have transactions coming down in later years – perhaps they would want to push those transactions into this year.”
Changes after 2012 include a new 39.6 percent top marginal tax rate for ordinary income, up from 35 percent. Taxes on net investment income will also go up at the end of the year, a 3.8 percent increase related to the Affordable Care Act. Some taxpayers will see a 0.9 percent increase in Medicare payroll tax in 2013, and the tax on long-term capital gains will go up five points to 20 percent.
Along with the increases, 2013 will mark the end of some provisions related to depreciation deduction. A 50 percent bonus depreciation deduction for qualified business assets – down from 100 percent in 2011 -- is set to expire at the end of the year. The Section 179 depreciation deduction is also lower in 2012 -- with inflation adjustments, those amounts are $139,000 for a single purchase, up to a total of $560,000 for the year.
Since assets depreciate at different rates, Mr. Kitts said that some individuals could time a depreciation deduction to help offset the increased tax rates expected after 2013.
For others who could realize an immediate benefit from the deduction, Moss Adams Wealth Services Partner Jay Silverstein suggested a cost segregation study of an asset. The approach could break apart an asset subject to depreciation like a building into multiple parts for tax purposes, allowing them to depreciate at their respective rates and often resulting in a deduction in that same tax year.
This article has been adjusted to reflect the correct Sec. 179 deduction for 2012.
