Why You Might Need to Do Tax Planning Now

The last deadline for 2011 income taxes just passed on October 15th, and the last thing that most of us want to do is to spend more time thinking about taxes.  Unfortunately, this year, we should.

Why 2012 is Special

Woman Doing Her TaxesMost years most people don’t need to do special tax planning or have a tax projection created for them.  If their circumstances haven’t changed too much from the past year, they can pretty much estimate what they will owe next April.

However, in 2013 there is one major change for high-income earners, one change for all wage earners, and another group of potential changes for all taxpayers that might make a 2012 trip to see your CPA cost effective.

  • For high earners: Healthcare reform is being financed in part by the extension of the Medicare tax on incomes over $200,000 (filing singly or $250,000 (filing jointly), and an excise tax on “Cadillac” insurance policies. (See Wikipedia for more details)
  • For wage earners: A temporary 2% reduction in the payroll taxes up to $110,000 in wages will expire January 1st.  This will result in an increased tax bill of $2,002 at the high end. Neither party seems inclined to extend this temporary reduction. (See CNN story)
  • Potential Changes for Everyone: 
    • The parties in Congress have not agreed on any extension of the “Bush Era tax cuts”.  Republicans refuse to vote for extensions that don’t include all people. Democrats insist that the cuts be eliminated for the well off, a term which is defined as people making more than $200,000 or up to $1 million, depending on the proposal.   If this impasse holds, then everyone’s tax rate will go up January 1st.  Without Congressional action, the lowest tax bracket will revert to 15% from 10% and the highest will be 39.6% instead of today’s 35%. (More details)
    • The parties in Congress failed to agree on deficit reduction measures.  As a result, the bipartisanly-passed Sword of Damocles will fall on the Federal budget, slashing spending.  These cuts, called sequestration, will stop $1.2 Trillion dollars in planned spending in unpredictable ways.  If a compromise is not reached and the automatic cuts avoided, businesses may suddenly find long-time orders and business relationships disrupted as across-the-board cuts hit Federal programs.  (See more)

Most years people try to put off realizing income past December 31st so that they can put off paying taxes for another 12 months.  But, this year is different.  If you are a high earner, you may want to take advantage of the 2012 rates that include the Bush Era reductions for all income levels.  If you earn less than $110,000, you may want to earn  as much as possible in 2012 when the 2% payroll tax cut is still in force.

In addition, you may want to put in place tax-minimizing retirement plans or take other actions so that you are ready on January 1st if rates do rise.

If Sterck Kulik O’Neill  can help with your tax strategy, please phone us at 415.433.4500. (More on CPA’s and income tax preparation.)