Boris Benic and Associates LLP - Certified Public Accountants and Consultants - Garden City, Long Island, New York

Boris Benic and Associates LLP - Certified Public Accountants and Consultants - Garden City, Long Island, New York

Resources - Tax Center - Boris Benic and Associates LLP - Certified Public Accountants and Consultants - Garden City, Long Island, New York

BIG Tax Changes Coming!
Plan Now to Avoid 2013 Increases


Did you know that on January 1, 2013, there will be a significant increase is several key income tax provisions? Boris Benic & Associates wants you to know that if Congress does not extend the Bush era and other tax cuts there will be a sharp increase in tax rates in 2013. To avoid these higher tax rates, it is essential to start developing a tax plan to avoid or minimize the adverse financial effects of these changes. Through a well develop tax plan you will be in the best possible position to take advantage of existing rates and prepared for any changes that may come next year.


Key Point: Several tax provisions are expected to expire at the end of 2012. Combined with new taxes there will be a significant increase in the amount of taxes paid by many individuals if a comprehensive tax plan is not created. PLAN NOW to ensure you avoid these increased rates!

Changing Tax Landscape

Below we have provided a brief description of the four tax provisions which are most likely to impact clients. These include:

  • Investment Income (Medicare) Surtax – There is a new 3.8% Medicare surtax to investment income earned beginning on January 1, 2013. As part of the Patient Protection and Affordable Care Act, this surtax applies to individuals, trusts and estates that have income which exceed a specific threshold. The income threshold amounts are $250,000 for married filing joint filers, $125,000 for married filing separately, and $200,000 for all other filers. Only non-resident aliens and certain types of trust will be exempt from the surtax.

  • Itemized Deduction Claw-Back – It is possible that a reinstated claw-back of itemized deductions will raise the tax rate on ordinary income to a projected high of 44% for some taxpayers.

  • Long Term Capital Gains Tax – As part of The Tax Relief, Unemployment Insurance Reauthorization and Jobs Creation Act of 2010 (Bush era tax cuts) the long term capital gains tax was reduced from 20% to 15%. If there is no move to extend this cut then the tax will revert to 20% at the beginning of the year.  There will also be an increase in the tax rate on qualified dividends from 15% to a whopping 44.6% in 2013.

  • Estate Tax Increase. The estate tax is scheduled to change from 35% to 55% and the generous exclusion amount will drop from $5,120,000 to $1,000,000.

Effective Tax Planning

To avoid these increases it is essential to develop a comprehensive tax plan which leave you with the most options possible. Below we have provided options that taxpayers may want to consider as we head towards 2013.


Gain Harvesting

For many taxpayers it will make sense to harvest capital gains in 2012 to take advantage of the current lower rates. You would sell appreciated capital assets and immediately reinvest in the same or similar assets. You would then hold the new assets until you would otherwise have sold them, so there would be no change in your investment strategy.


Deciding whether to use the strategy is not as simple as it might appear on the surface, however, because the lower tax rates must generally be weighed against a loss of tax deferral. By harvesting the gains in 2012 you would be paying a lower tax rate, but recognizing the gains earlier. The greater the differential in tax rates and the shorter the time before the second sale the more favorable gain harvesting would be.


In some cases, the correct decision will be clear without doing any analysis. If you are currently in the 0% long-term capital gains bracket, 2012 gain harvesting would always be favorable because it would give you a free basis step up. Gain harvesting would also be more favorable if you planned to sell the stock in 2013 or 2014 anyway. On the other hand, if you are currently in the 15% long-term capital gain bracket and die with an asset and pass it on to heirs with a stepped-up basis, there is no reason to recognize the gain now.


Medicare Surtax Planning

For tax years beginning January 1, 2013, the law imposes 3.8% surtax on investment income of individuals, trusts and estates. For individuals, the amount subject to the tax is the lesser of (1) net investment income (NII) or (2) the excess of a taxpayer's modified adjusted gross income (MAGI) over an applicable amount. (The income thresholds are $250,000 for married filing jointly, $125,000 for married filing separate filers, and $200,000 for all other filers.)


Net investment income includes dividends, rents, interest, passive activity income, capital gains, annuities and royalties. Specifically excluded from the definition of net investment income are self-employment income, income from an active trade or business, gain on the sale of an active interest in a partnership or S corporation, IRA or qualified plan distributions and income from charitable remainder trusts.


Boris Benic & Associates has identified a number of strategies to reduce MAGI, NII and the overall base on which the surtax is paid. These include Roth IRA conversions, tax exempt bonds, tax-deferred annuities, life insurance, rental real estate, timing estate and trust distributions, and charitable remainder trusts. Since each strategy is highly dependent on the individual’s situation, it is important to meet with your advisor to assess your specific situation.


Estate Tax Planning

The estate tax exemption is currently $5,120,000 per person and will revert to $1,000,000 on January 1st, 2013 (if no action is taken). While there is some discussion about changing the exemption to $3,500,000 there has been little agreement on Capitol Hill. As a result, the uncertainty over the estate tax is compelling many clients to make large gifts in trusts for their family including spouses, children, grandchildren and extended family members. Making large gifts now before the tax increase can result in a significant estate tax savings.


Contact Us

Unsure how these tax changes will impact your specific situation?  If so, then contact us now! Our tax professionals will review your financials to determine the best way to minimize your risk and overall exposure. For additional information contact Yasar Bokhari, CPA, at 516-248-7361, or click here to email Yasar. In a comprehensive consultation we can identify the areas of highest risk and develop an effective tax plan for you and your family.


Boris Benic and Associates LLP - Certified Public Accountants and Consultants - Garden City, Long Island, New York


Boris Benic and Associates LLP - Certified Public Accountants and Consultants - Garden City, Long Island, New York