HOW IS YOUR TAX HEALTH?
By Greg Kollmeyer, Greater Springfield LIVING WELL Magazine
With the end of the year approaching, it’s a good time to assess your personal tax situation and evaluate any recent legislative changes and how they affect you. In a very controversial decision, the U.S. Supreme Court recently upheld the constitutionality of the 2010 health care law. What does this mean to you, and how can you plan accordingly with this and other expiring “Bush-era tax credits?”
2010 HEALTH CARE LAW
Also known as Obamacare, this law not only mandates health care coverage, it created new tax law that goes into effect on Jan. 1, 2013––assuming no intervention from Congress. The main changes can be summarized as follows:
Medicare surtax – Perhaps the biggest change in the tax law is this one. There is a new 3.8% surtax on the lesser of annual net investment income (interest, dividends, royalties, rents, gains from dispositions of property and income from passive activities) or the amount by which your modified adjusted gross income exceeds $200,000 ($250,000 for married couples).
In addition to the 3.8% surtax, there is a 0.9% surtax on earned income exceeding $200,000 ($250,000 for married couples)
Medical deductions – Unreimbursed medical expenses have been allowed to be deducted to the extent that they have exceeded 7.5% of your adjusted gross income. This new law changes that percentage floor to 10% of your adjusted gross income for taxpayers under age 65 for 2013.
Flexible spending accounts – These accounts have had a $5,000 annual limit on pre-tax contributions to a FSA for dependent care purposes, now they have added a limit of $2,500 on health care contributions as well.
Other tax related provisions – A few other provisions in this law call for mandatory “minimum essential health coverage” or a non-deductible penalty that begins in 2014. Additionally, qualified small businesses can claim a tax credit for a portion of the health insurance premiums paid on behalf of their employees. This part has been in effect since 2010 and is a credit that is offered to businesses as well as non-profit organizations.
These items need to be addressed when planning for end of year 2012.
BUSH-ERA TAX CUTS
You’ve heard the phrase but do you know what it means? It’s very important to tax planning for 2012 to understand what these tax breaks were and that, without intervention from Congress, they will expire on Dec. 31, 2012.
- Capital expenditures – In 2010 and 2011, business were allowed to expense up to $500,000 in equipment purchases in one year, rather than depreciate them over their useful lives. This is referred to as Section 179 depreciation for the tax code that allows it. For 2012, that number is $139,000 and it drops to $25,000 for 2013 and beyond. This change can and should have a huge impact on small business tax strategies for the end of 2012.
- Capital gains rates – Without intervention, the 2001 and 2003 Bush tax cuts will expire and the maximum capital gains rate will increase from 15% to 20%. Additionally, the 0% rate for low-income investors jumps to 10%. Combine this with the 2010 Health Care Law’s new 3.8% surtax, and this is a hefty increase. This rate also increases the rate on qualified dividends (those received by a domestic corporation). We’ll talk more capital gains strategy shortly.
- Bonus depreciation – In addition to the Section 179 depreciation reduction, another small business bonus that allowed bonus depreciation for certain assets, allowing a 100% depreciation in the first year for 2011 and 50% for 2012 purchases is gone allowing 0% for 2013 purchases.
- Self-employment tax – Like the payroll tax reduction from 6.2% to 4.2% on social security on many American paychecks that is set to expire Dec. 31, 2012, this same law reduced self-employment tax from 15.3% to 13.3% and is also set to expire in December. Not a Bush-era tax cut but certainly an item to be made aware of for year- end planning.
- Tax rates – If the Bush-era cuts are allowed to expire, the 10% bracket disappears, the 15% bracket is squeezed down by $10,000 (eliminating the marriage penalty relief) the 25% bracket disappears but a 31% bracket will reappear and the top rate goes from 35% to 39.6%.
- Personal exemption and itemized deduction phase-outs – For year, both personal exemptions and itemized deductions were reduced after income thresholds hit a certain dollar amount. These were effectively eliminated in 2010 by the Bush cuts. Both of these phase-outs will reappear with the expiration of these cuts.
These are the highlights of what is at stake if these cuts are not extended. There are certainly passionate arguments on both sides as to what should happen to these.
With these changes, what can you do to minimize the tax impact on your personal situation? Certainly consult your tax advisor but here are two nuggets to chew on:
Capital gains – normally investors try to harvest capital losses at the end of the year to assist in offsetting capital gains and a portion of your higher taxed ordinary income. Consider passing up on selling those stocks at a loss prior to year end 2012 and instead consider selling those stocks and/or mutual funds that will realize taxable gains. With the rates set to go up, this is a real viable planning option for 2012. In addition, by carrying forward losses on stocks until 2013 and beyond, the $3,000 a year allowed to offset ordinary income can be used to offset the higher graduated brackets expected with the expiration of the Bush-era tax cuts.
Medical expenses – as mentioned before, the threshold for this deduction is 7.5% of adjusted gross income for 2012 and will increase to 10% for 2013 and beyond. Consider bunching your medical bills all in 2012 for maximum tax deductibility. If you are close to the 7.5% threshold, consider making sure all your medical bills and prescriptions are paid for by Dec. 31, 2012, regardless of the year they were incurred (charging them to a credit card qualifies as payment).
Of course, every situation is different, so be sure to consult your tax advisor for how these law changes will affect your personal situation. It’s important to assess your own tax health before year-end so that there is time to implement any last minute strategies.
Greg Kollmeyer CPA, CFE, CFF, MAcc, is a partner and founder of Kollmeyer & Company, LLC. For more information on this article or to schedule an appointment, call 417-881-9393 or email email@example.com.