The Importance of 2012 Year-End Tax Planning for Individuals


The end of 2012 may bring unexpected and adverse changes formany taxpayers due to the scheduled December 31, 2012, expiration of a number of tax cuts. Because most of these tax cuts have been in effect since 2001, many taxpayers have become accustomed to their existence and may not realize the effect that expiration may have on their personal tax bills. Although it is possible that Congress may act to extend a portion or all of these tax cuts, there is significant uncertainty surrounding whether such Congressional action will occur. In addition, new taxes and tax changes under The Patient Protection and Affordable Care Act (PPACA) will affect taxpayers beginning in 2013. As a result, taxpayers, with the assistance of their tax advisors, should undertake a careful review of their personal tax situation to take advantage of any year end tax planning opportunities for 2012.

Summary of Expiring Tax Incentives and New Taxes under the PPACA -

Higher Tax Rates. One of the most publicized changes to the tax law after 2012 is the increase in individual income tax rates. Unless Congress acts to change the law, the individual income tax rates are scheduled to increase effective January 1, 2013, so that the highest income tax rate is increased from 35 percent to 39.6 percent (applicable for taxpayers with adjusted gross income over $390,050). In addition, the current lowest income tax rate of 10 percent will expire and the lowest income tax rate will return to 15 percent. Other reduced tax rates, such as the favorable long-term capital gains rate and the qualified dividends tax rate (15 percent for taxpayers in the 25 percent bracket rate and above and zero percent for all other taxpayers), are also scheduled to end on December 31, 2012. As a result, the long-term capital gains rate would increase to 20 percent, and the qualified dividends income tax rate would again be subject to tax at ordinary income tax rates,which could be as high as 39.6 percent (and may be subject to the additional 3.8 percent Medicare contribution tax, discussed below). Also scheduled to expire is the 2 percent "payroll tax holiday" that has been in effect since January 2011, which reduced the Social Security tax rate from 6.2 percent to 4.2 percent.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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