Here we are, nearing year-end, and everyone’s favorite topic — income-tax planning. This year you should be hearing your CPA mention things like net investment income tax and the unknowns around the fate of the “extenders.” While the net investment income (NII) tax is not pleasant, it exists and can be counted on as a concern unlike the aforementioned expiring provisions which seem to fall in the “anyone’s guess” category.
Many experts believe the provisions that have expired will be extended, based on the premise that the economy is largely impacted by an active consumption base and many of the extenders are consumption oriented. Bonus depreciation comes readily to mind. As the House and Senate wade their way through the legislative process, taxpayers were assured of limited answers until after the distraction of the elections, at best.
What is a taxpayer to do? Turning to the traditional year-end approach makes sense at this point. By looking over investments you can determine if there is anything you should do before year-end to land in the best position regarding capital gains, losses, and the 3.8 percent tax on investment income. Good planning may help you keep items out of the NII category. There may be an opportunity to “bunch” deductions, maximizing the potential for dollars spent. Phase-outs and limitations make these decisions less than straight forward, so a comprehensive look at tax planning is wise.
More important than ever is the marginal tax bracket. You may have opportunities to leverage your marginal tax through a combination of income deferral, income shifting, and contribution of appreciated assets. In other words, be wary of tunnel vision. Just because something may seem like a good move before year-end, be sure to consider the potential benefits of a transaction that occurs next year. That next-year trigger might even be the first business day of the following tax year. Having said that, never put off saving for retirement. The dollars you save now will earn returns tax deferred or even tax-free.
If you have working-age children, consider helping them establish a ROTH IRA. Did I mention that it is never too soon to begin saving for retirement?
Many times tax planning is looked at simply in terms of reducing this year’s balance due. While this is clearly an important lens, there is more to consider. Have you thought about long-term gifting plans to children? Keep in mind that you can make tax-free gifts up to certain limits each year. Taking this approach, you will be reducing your taxable estate, shifting income-producing (read: tax-liability producing) assets and potentially sheltering assets from future exposure.
While trusts and annuities may seem scary, “trust” me — they can be highly effective and may well go a long way toward protecting your assets, your family, and ensuring that your philanthropic objectives are met.
Your best bet for a successful plan is to get one in place. Don’t wait for mid-December, call your CPA today and enjoy the luxury of holidays without tax planning hanging over your head.
Gail Kinsella is a partner in the accounting firm of Testone, Marshall & Discenza, LLP. Contact Kinsella at firstname.lastname@example.org