tax planning
Tax planning is best accomplished through focused attention to your individual situation. A valuable approach is to analyze your current position, and then test several "what if" scenarios in order to create a plan for minimizing your tax liabilities over a multi-year time frame.
The following are some year 2012 issues you might want to take into consideration in your planning:
- See the link for - "Health Care" legislation.
- High income individuals, (those with adjusted gross income over $1 million), for California estimated taxes, cannot rely upon the safe harbor rule of paying in either the prior year tax liability, or 110% of the liability if AGI is over $150,000, in order to avoid underpayment of estimated tax penalties. If you find yourself in this position, you should be calculating your tax liability quarterly and paying in no less than 90% of the anticipated taxes.
- A possible tax change that may make the S Corporation less desireable than the C Corporation beginning in 2013 is the reinstatement of phase outs of the personal exemptions and itemized deductions for higher incomers, along with the possible increase in the personal marginal tax brackets. But there are still some remaining advantages to the S Corporation structure, so a termination of the election should not be undertaken until examining all of the ramifications.
- The current estate tax rules are quite liberal, with a current $5,120,000 exemption, and even portability of the unused portion of the exemption from the deceased spouse to the surviving spouse. But these rules are due to expire at the end of 2012, at which time the law reverts back to pre-2010 law ($1 million exemption) unless legislation is enacted. While I feel fairly confident there will be some type of legislation, it would still be wise to review your estate planning, particularly if it has been some years since you have done so. The annual gift tax exclusion is still $13,000.
- ROTH conversions: Starting with the year 2010 the income limitations were abolished, so anyone can do a conversion. A conversion is when you opt to roll your regular IRA into a ROTH IRA. The ROTH has the advantages of accumulating investment income and appreciation tax free, with no tax even upon distribution as long as you leave the money in the account for five years, and, on the flip side, there is no minimum distribution requirement. The disadvantage is that there is no tax deduction when you make the contribution. But you cannot contribute to a ROTH if you are over certain income limits. Now you can do a conversion, though, no matter what your income level is. When you convert, you must report the value (as of the date of conversion) of your regular IRA as income on your tax return, thereby creating a tax liability. There are some complex issues to consider, such as whether the IRA you are converting has any portion that was originally non-deductible, and whether you are converting all or only some of your regular IRA. Also, whether or not this is beneficial depends on a multitude of known factors (your current age and current tax bracket) and unknown factors (your future expected tax brackets and how long you expect to live). It should be pretty obvious by now that this is not an action to take without doing some personal financial and tax analysis. But to get you started, the following would be the ideal Roth conversion set of circumstances:
- Fairly young taxpayer with many years left for the IRA to appreciate before withdrawn
- Expectation of being in a relatively high tax bracket at the time the IRA funds would be withdrawn, OR
- The desire and ability to never tap the funds, and instead pass them on to heirs (no requirement to withdraw a Roth as there is with regular IRA's)
- IRA investment is currently at a fairly low valuation, and there is the expectation of future appreciation.
- The ability to pay the tax on conversion with funds other than IRA funds
- Taxpayer is in a low tax bracket in the year(s) the conversion is reported.
Note that if you decide to convert, it may be beneficial to convert into several different ROTH accounts, as the various investments may behave differently, and you may wish to recharacterize one or more of the Roth conversions back to a traditional IRA.
NOTE: You should always consult your tax advisor before acting upon any tax planning ideas as there are often certain requirements, restrictions or possible contrary implications that must be analyzed with your particular situation in mind.