Beginning-of-Year Tax Planning

As 2012 starts, keeping an eye on tax strategies to reduce your 2012 taxes

is crucial. Shifiting income and deductions, increasing retirement

savings and taking advantage of tax credits and deductions can have a

major impact on your tax liability.

Increase Retirement Accounts Contributions

401(k)

Deferral limit increased to $17,000
Many taxpayers have not taken full advantage of higher limits available since 2009
Limit applies to 403B and 457B plans also
Maximum catch up contribution remains at $5,500

Other Employer Plans

Simplified Empoyer Plan (SEP). Contribution limits is lessor of 25% of compensation or $50,000.
Simple IRA. Small business plan with matching contributions up to 3%
Payroll deduction IRAs
Money Purchase Plans. Mandatory annual contributions as hight as 25% of covered pay.
Profit Sharing Plans. Discretionary contributions tied to company profits (or other criteria)

Roth IRA and Conversions

Consider converting regular IRA to Roth IRA (contact tax advisor for assistance, and proceed
with caution.)
Maximize contributions ($6000 with $1000 catch-up)
Consider a "backdoor" Roth contribution if near or above income limits. (regular IRA non-deductible
contribution immediately converted to Roth IRA)

Estate and Gift Planning - Current Laws in Flux

Stategies to consider today in anticipation of changes to Estate and Gift tax laws in 2013

Current $5.12 million exemption may decrease to $1 million in 2013 - Consider these estate planning techniques:
Grantor Retained Annuity Trusts (GRAT) Consider asset transfer and appreciation freeze that GRATs provide. Availability of the planning stategy may end in 2013
Intentionally Defective Grantor Trust (IDGT) The intentionally defective grantor trust has many of the advantages of the GRAT without the mortality risk.
Contact your financial advisor or a CPA at Maxwell Shmerler & Co. for details on these and other planning techniques...but before it may be too late

Alternative Minimum Tax Planning

The Congressional Budget Office forecasts that in 2012 nearly every married taxpayer with income between $100,000 and $500,000 will owe some alternative tax.

AMT Exemption Amounts for 2011

Legislated as part of the 2010 Tax Relief Act:

$48,450 for single and head of household filers,
$74,450 for married people filing jointly and for qualifying widows or widowers, and
$37,225 for married people filing separately.

AMT Exemption Amounts for 2012

The alternative minimum tax exemption amounts for 2012 are scheduled to revert to the following levels:

$33,750 for single and head of household filers,
$45,000 for married people filing jointly and for qualifying widows or widowers, and
$22,500 for married people filing separately.

As you can see, the amounts return to the “normal levels” of $33,750/$45,000/$22,500, respectively, in 2012 unless Congress takes action to maintain the patch. Elimination of the
AMT is a goal of long-term tax reform, but the loss of revenue has been considered too high in the past.

AMT Tax Planning

Devising tax strategies around the alternative minimum tax can be tricky, since the AMT often adjusts for various deductions and credits. In general, tax professionals recommend the following planning tips.

Seek reimbursements from your employer for business expenses incurred as an employee. These expenses are part of the miscellaneous itemized deductions, which are added back to your income for AMT purposes. Having your employer reimburse you for those expenses, by contrast, is a tax-free event to you, and prevents a higher AMT adjustment.

Review your state tax withholding so that you pay in enough so you don't owe but not enough that you substantially overpay. This will keep your state tax deduction to as low as possible, thereby keeping your AMT adjustments as small as possible.

Pay your property taxes when due instead of prepaying your next installment by the end of the year. Again, this will keep your deduction for state and local taxes as low as possible.

Sell exercised incentive stock options in the same year you exercise them. When you exercise & sell incentive stock options in the same year, you'll be subject to the regular tax on the income but not the AMT. However, if you exercise but not sell, the value of the exercised options because income for AMT purposes.

In general, the best way to handle AMT liability is careful planning involving the coordination of future regular income tax and the AMT, using accurate projections of income, expenses, and deductions over multiple years with several alternative scenarios. An overall plan must then be devised to manage your AMT liability without raising regular tax liability. The unknown factor of future income tax rates could possibly undermine the best tax planning projection scenarios.