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It’s Time for Mid Year Tax Planning


You may have an unprecedented opportunity to reduce your taxes in the following ways before the end of 2012, when the Bush-era tax cuts are set to expire, estate and gift tax exemptions are scheduled to shrink back to $1 million, and current proposals could diminish the planning advantages of grantor and dynasty trusts. Here are some Do’s and Dont’s that you need to address NOW while there is still time to implement these changes by year-end. For estate and gift taxes, this is a once in a lifetime opportunity!!!

Don’t make the mistake of thinking this is a repeat of 2010, when the Bush-era tax breaks were extended, and therefore do no planning. The story and the players are different in 2012, so the ending may be different as well.

Be ready to accelerate income and defer expenses based on what transpires at year end. Significant savings may be possible if tax rates jump in 2013, coupled with the new 3.8% Medicare surtax on investment income. Types of income that will be subject to the surtax include taxable interest, dividends, annuity income, passive royalties, and rents. Consider shifting this income into 2012 and/or implement strategies to reduce net investment income and modified adjusted gross income in 2013 and forward. Look at income acceleration strategies such as gain harvesting, Roth conversions, and retirement distributions.

Consider accelerating itemized deductions into 2012. Itemized deductions may once again be limited in 2013, so accelerating these deductions into 2012 may be prudent.

Assess whether investment portfolios should be reallocated. It may make sense to shift assets between qualified and nonqualified accounts and rethink asset allocation (i.e., growth vs. income stocks, muni bonds, etc.).

For estate taxes and existing trusts, devise a game plan now that you are prepared to put into action, if necessary, at year end. It will take time to analyze the impact of the changes on you and to have attorneys draft documents early and have valuations prepared, if necessary.

Determine whether you should make gifts now to use the $5 million gift exemption that may revert to $1 million in 2013. This may be the last opportunity for you to save a significant amount in federal and state estate and gift tax.

Plan to implement grantor retained annuity trusts (GRATs), if they make sense, since their benefits could be curtailed. President Barack Obama has proposed limiting the minimum GRAT term to 10 years and eliminating the zeroed-out GRAT option.

Plan for a potential change in estate and income treatment of grantor trusts. Obama’s proposals also would include grantor trust assets in taxable estates and gifts and impose tax on trust distributions.

Don’t overlook possible changes for generation-skipping transfers. Another proposal would limit the duration of the GST tax exemption to 90 years, thereby reducing the value of dynasty trusts.

Adopted from July 2012 Journal of Accoutancy Writer Ted Sarenski, CPA/PFS, CFP, AEP, president and founder of Blue Ocean Strategic Capital LLC in Syracuse, N.Y.

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