Accounting firm offers year-end tax planning advice

The accounting firm of Leffel, Otis & Warwick, P.S., with CPA offices in several nearby towns throughout the area in addition to Odessa, has provided two articles to help remind readers that actions can be taken now to reduce tax burdens come next April 15.

Tax changes and

upcoming deadlines

With another calendar year-end almost upon us, it is important to review some upcoming deadlines for 2012 and changes for 2013.

Payroll: The payroll tax cut for the employee’s share of Social Security taxes is set to expire January 1, 2013. The rate will increase back to 6.2% from 4.2%.

Medicare surtax on earned income: Beginning in 2013, there is an additional Medicare tax of .9% on high income workers ($200,000 for single filers or $250,000 for joint filers). Employers will be responsible for withholding the .9% from wages over $200,000. There is no employer match on this tax.

Medicare surtax on unearned income: Also for 2013, a 3.8% surtax will be imposed on net investment income. The tax is on the lesser of net investment income or the excess of modified adjusted gross income over $200,000 for single filers or $250,000 for joint filers.

Itemized deductions: If you claim itemized deductions on your individual income tax return, you may want to consider “bunching” expenses in either 2012 or 2013, depending on which is most beneficial for your tax situation. For example, if you need additional itemized deductions, you may consider paying for medical expenses or making additional charitable contributions in December for a 2012 deduction. Of note, the threshold for deducting medical expenses increases from 7.5% to 10% of adjusted gross income in 2013 for most filers.

Depreciation: The rules for depreciation change significantly in 2013 unless Congress takes action to modify the law. During the 2012 calendar year, bonus depreciation is at 50% of the cost of new assets, but at this time is set to be eliminated in 2013. Additionally, Section 179 expensing limit is $139,000 for tax years beginning in 2012, but decreases to $25,000 for tax years beginning in 2013. In order to reap the benefits of these higher 2012 depreciation deductions, you may consider completing projects or making purchases before your year-end.

Due dates:

• Contributions to your Traditional IRA or Roth IRA for the 2012 year can be made until April 15, 2013.

• If you make estimated tax payments for your individual income tax return, don't forget the due date for making the fourth quarter payment is January 15, 2013.

• If your business issues Forms W-2 or Forms 1099, be sure to have copies to the recipients by January 31, 2013. (Note: Employers who issue fewer than 250 W-2 forms for the 2012 wages are not yet required to include the health insurance premium as an amount on Box 12 of the Form W-2.)

FAFSA: If you will be filing the Free Application for Federal Student Aid (FAFSA), now is the time to start preparing. Starting January 1, 2013 students may complete and submit FAFSA forms to apply for financial aid. If you don’t already have one, now is the time to apply for a PIN number. This enables you to submit the form online. Now is also the time to round up information needed to answer the questions on the FAFSA form. Visit the http://www.fafsa.ed.gov website, and browse the help area for information on documents you may need before you begin.

Year-end tax planning is ideal to ensure proper income levels are obtained to maximize tax benefits.

Proactive tax planning

Proper planning at year-end can save you money and angst when it comes time to file your federal income tax returns. It is also a good time to review business situations from topics of cash flow planning to retirement planning.

We are facing the expiration of the tax rates enacted in 2001 and the expiration of more than 150 tax provisions, which could result in a much higher tax liability when you file your 2013 income tax return. As we near the edge of the “fiscal cliff,” several changes are looming, including but not limited to an increase in the capital gain tax rate, reinstatement of the "marriage penalty" and an increase in the number of estates subject to the estate tax.

Many of these changes will have an impact on your individual or business income tax return, and possible actions now can soften the potential burden. Proactive planning makes good business sense. Making time to meet with your CPA or other tax professional allows you to have a plan in place to maximize your tax opportunities.

Typical situations that benefit from year-end discussions with accountants/tax advisors include:

• Business owners with unusual income or expenses that have occurred -- how to minimize any tax and cash flow effects;

• In times of good prices or high yields, planning is even more important to determine the best time to contract and/or sell grain;

• College planning may be a top concern, and with proper planning, parents can maximize their financial aid opportunities;

• Refinancing debt or incurring more debt to fund business expansion may be issues to be discussed;

• Succession planning may be another topic which requires not only financial planning, but also emotional preparation.

The proactive approach of year-end planning can help minimize future tax surprises. Contact your accountant today.