This will be a challenging year for BWFA’s tax team. A lot has been written about 2012 and 2013 tax law. Here’s a selected summary of the changes and the planning opportunities as they exist now.
Retirement plan contributions
As always, BWFA recommends that all eligible persons make as much of a contribution to their retirement plans as they can afford. For 2012, the maximum amount you can contribute to your 401(k) plan is $17,000, an increase from $16,500 in 2011. If you’re age 50 or more, you can add another $5,500.
Your employer also can make a contribution to your 401(k) that could take the total contribution amount to $50,000. Many employers have limits on these contributions, so you may not be able to reach the full $50,000. However, if you are self-employed and have an individual 401(k), you DO have the flexibility to use the entire $50,000 contribution limit.
The maximum 2012 contributions to IRAs have not changed. They are $5,000, plus a catch-up contribution of $1,000.
Social Security wage limit
Wages will be taxable for Social Security up to a wage base of $110,100. This is up from $106,800 in 2011. At the top federal tax bracket, the tax increase will be a maximum of $139 per year. The nominal amount of the Social Security tax is 6.2%, but Congress recently approved keeping it at 4.2% for 2012, as it was last year.
The section 179 deduction (business equipment depreciation) has been reduced to $115,000, down from $500,000 in 2011. Bonus depreciation will decrease to 50%, down from 100% in 2011. Business owners who purchase more than $115,000 of equipment in 2012 should plan their purchases carefully.
For 2012, the federal estate exemption equivalent has increased to $5.12 million, from $5 million last year. Maryland’s estate tax exemption remains at $1 million.
The annual federal gift exclusion stays the same at $13,000.
Adoption tax credits
Adoptive parents can take tax credits of up to $12,650 per adopted child, down from $13,360 in 2011. They can spread the credit over multiple years. Employers can reimburse for adoption expenses up to that same amount, and the benefit is not taxable to the employee. However, the credit is lost to married taxpayers whose income exceeds $229,710 (in 2012).
Tax Planning for 2013
It’s always hard to look ahead on tax policy, but we see that pressure is increasing for taxes to rise. Tax increases already on the books for 2013 will affect investment income, itemized deductions, and personal exemptions.
Beginning in 2013, there will be a 3.8% surcharge on investment income when total income exceeds $200,000 for single filers and $250,000 for married filers. Any gain (taxable or excludable) on the sale of a home would be subject to this 3.8% surcharge. In addition, any taxpayers with total income that exceeds the $200,000/$250,000 ranges will have an extra 0.9% Social Security tax on wage income over the threshold amounts.
Phaseouts of itemized deductions and personal exemptions
We have had a two-year reprieve in 2011 and 2012, but the phaseouts for itemized deductions and personal exemptions are scheduled to reappear in 2013. When total income reaches $250,290 (2009 figure), taxpayers will begin to lose a portion of these deductions.
Bush tax cuts expiration
The biggest factor is the one with the least certainty: the Bush tax cuts. If these are permitted to expire at the end of 2012, capital gains would revert back to 20%; the top federal marginal income tax rate would revert to 39.6%; and there would no longer be a 15% qualified dividends tax rate. The marriage penalty relief would expire. The Child Tax Credit would expire, too.
While we don’t expect all of those events to occur, the general pressure tells us that taking capital gains in 2012 would be preferable to waiting until 2013.