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If you ask Bernard Kiely of Kiely Capital Management in Morristown, N.J., about the positive changes in tax planning this year, he’s to the point: There are “no good things,” he says, describing the situation as a train speeding off an open bridge. “If nobody closes the bridge,” he warns, many existing tax planning items will change at the end of the year and it won’t be for the better. In fact, several already have.
That said, he points out that planning can mitigate the situation so that next year won’t be as horrible as it could be. While there is nothing to be done about some of these changes, others can be planned around.
So what does Kiely suggest advisors look for as they develop strategies for their clients throughout the year? He names 14 areas, both in expirations and increases, that will need attention—either immediately or in the future—unless Congress gets its act together and decides to change the situation.
The first five items to watch expired at the end of 2011:
1. The Alternative Minimum Tax (AMT) Patch—Kiely says that, going forward, this could mean millions will pay the AMT who were never subject to it before.
2. Charitable Contribution of IRA Assets—A taxpayer who was receiving required minimum distributions (RMDs) from an IRA and wished to contribute that money to charity could have had it sent directly from the IRA custodian to the charity. In so doing it would bypass the individual’s tax return, lowering total income and possibly income tax as well. Alas, no longer.
3. State Sales Tax Deduction—Taxpayers will no longer be able to deduct state sales tax. Since it has been a choice of whether to deduct state sales tax or state income tax, residents of states without an income tax will lose out.
4. Home Energy Tax Credit—This credit for $500 is no longer available.
5. School Teachers’ Expense Deduction of $250—Teachers who have been dipping into their own pockets to help provide for their students can no longer rely on this deduction.
On Their Way Out
Five measures also expire at the end of 2012—again, barring Congressional action. They are:
1. Payroll Tax Cut of Two Percentage Points—This will go away, resulting in the resumption of the customary 6.2% rate.
2. Top Income Tax Rate of 35%—This will change to 39.6%.
3. Capital Gains Tax Rates—Both the 0% and the 15% brackets will disappear, to be replaced by a single bracket of 20%.
4. Qualified Dividends Tax Rate—This bracket, which taxes qualified dividends at 15%, will disappear entirely and those dividends will be taxed as ordinary income.
5. American Opportunity Education Credit—This, too, will disappear.
Coming Next Year
Kiely also warns about four tax increases scheduled to take effect in 2013. They are:
1. Net Investment Income Tax—This will be 3.8% for filers making over $200,000 (individuals) or $250,000 (married)
2. Phaseout of Personal Exemption—Says Kiely, “For a number of years the personal exemption was phased out as your income went up.” While the phaseout expired (briefly), it is set to resurrect in 2013.
3. Itemized Deductions Limit—The “Pease” limit on itemized deductions, Kiely explains, will hit those with incomes over $150,000.
4. Flexible Spending Account Limits—These are being cut from $5,000 to $2,500.
See AdvisorOne’s Special Report, 22 Days of Tax Planning Advice for 2012, throughout the month of March.