Planning in 2012 for 2013 Tax Law Changes (Part II)

  • Following are the next series of tax law changes (continued from Part I) that you should anticipate and plan for in 2012 as a result of the expiration of the “Bush Tax Cuts” (BCT) and the “Health Care Reform Act” (HCA):

Medicare Tax Surcharge on Investment Income for High Income Individuals (HRA).

  • For individuals with Adjusted Gross Income (AGI) over $200,000 and for couples over $250,000 there will be an extra surcharge tax of 3.8% on your investment income.  This includes interest, dividends, net capital gains, annuity income, royalties and net rental income.  The surcharge is calculated on the amount of investment income that is included in your AGI to the extent that it takes AGI above the thresholds of $200,000 or $250,000.

The “Floor” for the medical expense deduction has been raised from 7.5% of AGI to 10% of AGI (HRA).

  • Most individuals cannot use the medical expense deduction as their expenses do not exceed the floor of 7.5% of their AGI.  Now, even fewer will qualify as the floor has been raised to 10% of AGI.

The Alternative Minimum Tax (AMT) exemption deduction is set in the tax code as an amount from the early 1990’s.  Every year, congress passes legislation late in the year to raise the exemption deduction to current day amounts based on inflation.  This has not been done for 2012 or 2013.

  • Congress has not figured out a way to pay for this on an annual basis, so they typically pass legislation late each year (they call it the AMT Patch) to raise the exemption amount so that millions of additional taxpayers will not be subject to the AMT.

Planning opportunities that you may consider for 2012 and 2013:

  • Consider review of your investment portfolio to determine if the potential for large tax increases would change your investment mix.  Capital gains and qualified dividends could go from 15% tax rate to as much as 43.4% (39.6% plus 3.8% medicare surcharge).
  • Consider income timing and bunching of income so that some years your investment income may not be subject to the medicare surcharge.
  • If you rent a building to a business that you own, consider the effect of the investment income on your personal taxes and consider re-evaluating your current lease with your business (although it must still be a market value rent).
  • If you rely on a large deduction for medical expenses, calculate the effect of the changes above and consider “bunching” of expenses into every other year if that is helpful.
  • Since there is little that we can do in Oregon pertaining to the AMT tax, just be aware that you may have higher taxes if the AMT Patch is not passed by congress (although it has for every year since the 1990’s).
  • Finally, don’t get caught underpaying your taxes as there are penalties for not anticipating these changes and not withholding or paying in enough on a quarterly basis.

Don’t be caught off guard with these changes and have an April Surprise (the wrong kind of surprise).  Contact our office for help in decoding your tax position with these changes.

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