2011 Year-End Tax Planning

Nancy Moriarty – Tax Services
Sangini Goenka – Tax Services

Tax Outlook for Individuals for 2011 and 2012

In December 2010, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act (“TRA 2010”). TRA 2010 extended individual income tax rates through 2012; set estate, gift, and generation-skipping transfer tax exemptions and rates; and temporarily reduced the payroll tax burden on employees, among other things.

For more information about TRA 2010 and other current tax breaks, please click here to read a comprehensive analysis of the bill.

This chart compares current tax rates for 2011 and 2012 to the expected tax rates for 2013 and beyond, barring any new legislative changes.

Comparing 2011 / 2012 Tax Rates to 2013 Rates
2011 / 2012 20131
Income Tax Maximum Rate 35% 39.6%2
AMT Maximum Rate 28% 28%2
Medicare Tax on Wage Income Over $250,000 0% 0.9%
Medicare Tax on Net Investment Income (Modified Adjusted Gross Income Over $200k for Single and $250k for Married Taxpayers) 0% 3.8%
Maximum Long Term Capital Gains 15% 20%2
Qualified Dividend Rates 15% 39.6%2
Estate Tax Exemption $5,000,000 $1,000,000 2
Estate Tax Maximum Rate 35% 55%2
Gift Tax Exemption $5,000,000 $1,000,000 2
Gift Tax Maximum Rate 35% 55%2
Annual Gift Tax Exclusion $13,000 $13,000 2
Maximum Direct Gift from IRAs to Charities (if owner is over 70.5) $100,000 3 N/A
  • Pending any legislative changes.
  • In 2013, the exemption amounts and rates will return to pre-2001 amounts.
  • This provision is set to expire on December 31, 2011.

There are a number of interrelated changes affecting the tax outlook. Due to the complexity and uncertainty involved, we would encourage you to engage in discussion with your tax advisor before making any major decisions.

Capital Gains and Dividends

For 2011 and 2012, taxpayers below the 25% bracket pay no tax on capital gains and qualified dividends, and taxpayers in the 25% bracket and above pay a 15% tax on capital gains and qualified dividends.

Itemized deductions

In 2011 and 2012, there is no phase-out for itemized deductions for taxpayers at any amount of adjusted gross income (AGI).

Roth IRA Conversion

During 2010, the removal of limitations for taxpayers with AGI over $100,000 allowed wealthier taxpayers an opportunity to convert their traditional IRA to a Roth IRA without tax penalties. Before you convert to a Roth IRA, you should review your financial situation and consider your expected retirement income from other sources and your anticipated tax rates during retirement. If you determine that you are a candidate for a Roth IRA conversion, you would then pay income tax on the amount being converted. Converting to a Roth IRA offers some excellent benefits, such as the tax free growth over your life and you are not required to take any distributions.

If you decide to convert a traditional IRA to a Roth IRA during 2012, you will have until October 15, 2013 to reverse the conversion.

Alternative Minimum Tax (AMT) Liability

In 2011, the AMT exemption amount will be $48,450 for individuals and $74,450 for married taxpayers. The Act also allows nonrefundable personal credits (such as the dependent care credit or child credit) to offset AMT liability.

Tax-free Distributions from IRAs for Charitable Purposes

In 2011, individuals over age 70 and 1/2 may transfer $100,000 from an IRA to a qualified charity free from income tax and have this amount count toward their required minimum distributions. Private foundations and donor advised funds are not eligible charities but most public charities will qualify. This provision is temporary, has been extended twice and is set to expire in 2011.

Qualified Small Business Stock (QSBS)

QSBS is stock issued by a C corporation that meets certain requirements, including that proceeds from the stock issuance plus gross assets do not exceed $50,000,000. Taxpayers who purchase QSBS between September 27, 2010 and January 1, 2012, and hold the stock for at least five years, may exclude up to 100% of the gain from the subsequent sale of the stock.

If you invested in a small company during this time period, consult with your tax advisor to see whether the Company meets the definition of QSBS.

Tax Outlook for 2013 and Beyond

In 2013, many tax rules are scheduled to change as legislation expires on December 31, 2012. Unless new legislation is passed to extend tax cuts and raise exemption amounts for the AMT, estate tax, gift tax, and generation-skipping tax, these amounts will return to pre-2001 levels.

Barring new legislation, changes in tax rates for 2013 are:

  • The 33% and 35% tax brackets will increase to 36% and 39.6%, respectively.
  • Long-term capital gain rates will increase from 15% to 20%.
  • All dividends will be taxed at ordinary rates.
  • A newly levied 3.8% Medicare tax on net investment income will go into effect for individuals with modified adjusted gross income (MAGI) over $200,000, married couples with MAGI over $250,000, and trusts with MAGI over $12,000.
  • Additional 0.9% Medicare tax will be owed on wages over $250,000.

If the current tax laws are not changed or updated, 2013 will see higher marginal tax rates and limitations on itemized deductions. This makes 2011 and 2012 especially important years for tax planning.

Also expiring or changing in the 2013 tax year are the following:

  • Deduction of state and local sales tax will no longer be allowed.
  • Deduction of student loan interest will no longer be allowed.
  • The American Opportunity college education credit will expire.
  • Income tax exemption for debt forgiven on home foreclosures and repossessions ends.
  • The child care deduction limit of $3,000 will revert to $2,400.

In short, now is the time to take a focused look at your financial position and future goals. There are additional tax-related articles to keep you informed, including Year-End Planning: Private Foundations (as well as articles on a variety of financial topics) here in our online library. It is always prudent to discuss important decisions with your tax advisor, and we encourage you to engage in discussions regarding your financial position and future goals on a regular basis throughout the year.

Any tax advice in this communication is not intended or written by Frank, Rimerman + Co. LLP to be used, and cannot be used, by a client or any other person or entity for the purpose of (i) avoiding penalties that may be imposed on any taxpayer, or (ii) promoting, marketing, or recommending to another party any matters addressed herein. With this alert, Frank, Rimerman + Co. LLP is not rendering any specific advice to the reader.