Smart Moves to Minimize Your Fiscal Cliff

By Michael Bohinc, CPA & PHCC MemberCPA Picture

As 2012 comes to a close with no agreement in place to keep us from falling over the proverbial "fiscal cliff," it reminds me of the story of the Roman emperor Nero fiddling while Rome burned. While Congress argues over revenue enhancements (taxes) and spending cuts, the American taxpayers are the ones paying the price.

While there has been a lot of discussion on the impact of the ending of the Bush-era tax cuts, there has been little light shed on a tax increase that has already taken effect and will impact over 30 million taxpayers when they file their 2012 tax returns. This tax was originally implemented to make sure that the 155 highest-income households paid at least a minimum amount of tax. Before this "alternative minimum tax" (AMT) was created, most of those households paid little or no taxes because of loop holes in the tax code.

In theory, it made a lot of sense. However, because exemption and phase-out amounts were never indexed for inflation, this tax is now negatively impacting the middle class. According to some estimates, nearly 50% of taxpayers with incomes between $75,000 and $100,000 will get hit with this alternative minimum tax in 2012 and pay an average of $3,700 ADDITIONAL taxes if Congress does not pass a new "AMT patch." The last patch expired December 31, 2011 and we are now under the "old" (much lower) AMT exemption and phase-out amounts.

It is imperative that you talk to your CPA or tax person immediately to see if you'll be impacted by this tax as it impacts your tax return this year!

Here are a few other year-end tax issues to consider:

 - With the pending increase in tax rates and the return of the phase-out of itemized deductions for higher-income taxpayers, it may make sense to make significant charitable deductions (to charities like the PHCC Educational Foundation) this year rather than next year.

 - You may want to consider declaring a dividend prior to year-end if you are a shareholder in your business as the preferential tax rates (0 & 15%) on qualified dividends are going away and dividends will revert to being taxed at ordinary income rates which can reach as high as 44.3% in 2013 with the new Medicare taxes that are coming.

 - You may want to consider investing in capital assets (vehicles, equipment, etc.) prior to year end as the 50% bonus depreciation deduction will be disappearing as well.

 - Those of you with higher adjusted gross incomes ($200,000 for single & $250,000 for married filing joint taxpayers) may consider pulling investment income (capital gains, dividends, sale of rental real estate, etc.) into 2012 to minimize the impact of the new Medicare taxes (.9% & 3.8% respectively) that kick in on January 1, 2013 as part of health care reform. Additionally, since we know tax rates certainly won't be going down next year, any income you pull into this year would most likely be at lower rates.

There are so many other issues that it's imperative you talk to you CPA or tax person as soon as possible. If no law is passed by year-end to address these issues, over 150 different provisions of the tax code will expire. In a "normal" year, there may be 20 to 30 expiring provisions. Most every taxpayer will be impacted in some way on their 2012 and/or 2013 tax returns.

  • PHCC members can watch a full webinar on this topic Michael conducted for the PHCC Educational Foundation. Just log in & follow this link.

United States Treasury Department Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that, unless expressly stated otherwise, any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

Michael A. Bohinc is a certified public accountant in Cleveland, OH and the Chief Financial Officer for his family's plumbing business. He is also an instructor for the National PHCC Educational Foundation. He can be reached at: 440/ 708-2583, e-mail mbohinc@keepingscorecpa.com.

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