2012 Planning: Tax Issues for Higher-Income Individuals

We know that you have worked hard for your money and would like to reap the benefits to the greatest extent possible. Your ultimate goal is to sustain a successful wealth-building strategy while avoiding unnecessary and expensive tax consequences. We are interested in helping you achieve these objectives.

You are probably aware that the previously extended EGTRRA tax benefits are set to expire at the end of 2012. Numerous tax reform proposals have been made, including variations of the “flat tax,” as well as the imposition of a minimum effective tax rate for higher-income taxpayers (the so-called “Buffet Rule.”) However, it does not appear that fundamental tax reform will come to fruition before the fall elections. Beginning in 2013, higher-income taxpayers like you may assume an increased tax burden through higher tax rates and/or more limited deductions. It may be advantageous for you to shift income into 2012 while the lower tax rates are still available.

Although you are still able to benefit from the individual marginal income tax rate reductions provided by EGTRRA in 2012, the following tax provisions will not be available unless they are retroactively extended by Congress:

• Above-the-line deduction for certain out-of-pocket classroom expenses
• Above-the-line higher education tuition deduction
• AMT patch
• Itemized deduction for state and local general sales taxes in lieu of state and local income taxes
• Mortgage insurance premium deduction
• Personal tax credits allowed against regular tax and AMT
• Tax-free IRA distributions to charity

Even more tax incentives will go by the wayside in 2013 unless Congress acts to extend them or make them permanent. These include:

 

• Child tax credit, child and dependent care credit, and adoption credit enhancements
• Employee payroll tax cut
• Marriage penalty relief
• Reduced capital gain rates
• Repeal of the itemized deduction and personal exemption phase-outs
• Taxation of dividends at capital gain rates
• Various education-related incentives, including the American Opportunity Tax Credit

There are several revenue-raising provisions that were enacted as part of the healthcare legislation in 2010 that target higher-income taxpayers. These provisions become effective for tax years beginning in 2013:

• Additional Medicare tax for higher-income employees and self-employed individuals
• Additional Medicare tax of 3.8 percent on a portion of your net investment income
• Itemized medical expenses are deductible only to the extent they exceed ten percent of adjusted gross income (the previous threshold was 7.5 percent of AGI)Contributions  to Health FSAs through salary reductions limited to $2,500

If you have global financial interests, you can expect greater scrutiny by the IRS. You may have exposure under the FBAR and/or FATCA provisions of the HIRE Act, which increases disclosure and reporting requirements for foreign accounts, and provides penalties for noncompliance. However, to encourage full disclosure of unreported offshore accounts, the IRS has reopened the offshore voluntary disclosure program (OVDP). This program offers individuals the opportunity to disclose their foreign accounts and pay reduced penalties, rather than risk IRS detection and possible criminal prosecution at a later date.

The more complex issues faced by higher-income individuals create a challenging planning environment for the 2012 tax filing season. We would like to meet with you to discuss the options that are best suited to meet your personal financial goals, while minimizing your tax liability. Please contact our office at your earliest convenience to make an appointment.