Tax Gifts from Santa (Were You Naughty or Nice)

Who will be the better quarterback long term, Andrew Luck or RGIII?  As always, I bring you the definitive answer.  I definitively have no clue.  Before the season began, I would have given you 100 to 1 odds Luck would be better.  Now after thirteen games, I'm not certain the question is even relevant.  If I'm a defensive player, I can choose death by air (Luck) or death by land and air (RGIII).  Thirty plus points is the result either way.

The funniest moment from last week's Redskins vs. Ravens game was a Raven's outside linebacker chasing and tackling Alfred Morris on the other side of the field.  There was just one problem.  RGIII had the ball, charging through the hole left by the departed linebacker.  I'll bet the linebacker felt great this week in practice watching the play on video.

This year the pedophile, who hangs out at the mall dressed in red and judges us naughty or nice, brings us gifts wrapped in dollars.  He has brought us some tax planning gifts to unwrap before the end of the year.

Th key point Santa wants us to remember for 2012 is that all of our usual year end tax planning tricks are wrong.  Usually, we accelerate expenses and deductions and defer income.  Santa knows that some of you are naughty and don't unwrap and deposit checks you receive the last week from customers.  For 2012, all of that is wrong, because if there is one tax certainty for 2013, it is higher taxes.

So bribe the mailman to bring you more customer checks to deposit before year end in 2012.  Don't mail a year of rent checks to your landlord on December 31st, unless I'm your landlord.  In 2012, we want more income and less in deductions, because our taxes will be lower in 2012 than 2013.  Here is what Santa is bringing all of you naughty high income taxpayers for 2013.

 Santa considers you a high income taxpayer if you are married with more than $250K in adjusted income.  If you are wise enough to still be single, the income amount is $200K.  For 2013, Santa wants you to remember that the true meaning of Christmas is the spirit of giving - giving to Uncle Sam.

His first red wrapped goodie is a .9% Medicare surcharge on earned income above $250K (again $200K if you're too homely to marry or are otherwise single).  If you get wage or self-employment income this applies to you.  You can, however, return at least part of this gift if you keep the receipt.  You can accelerate salary from 2013 into 2012.  That means take a couple extra paychecks, that you would have received in 2013, in 2012.

The red pedophile's next goodie is a 3.8% Medicare surcharge on investment income received by taxpayers with adjusted gross income over $250K ($200K if you divorce the wife beater by 12/31/12 or are otherwise single).  The income included in this dried out fruitcake of a present is interest, dividends, capital gains, net rental, and any other investment income.  The way to minimize this joy to the world tax is to get all the income you can in 2012.  While you cannot do much about making Apple pay an extra dividend in 2012, you can sell the stock and pay taxes on the gain in 2012 instead of 2013.  Also, this isn't the year to repair the roof on your rental property.  The deduction will be worth more in 2013.

Not only is Santa bringing us some unwanted tax goodies for 2013, the fat bastard is taking away some of the gifts he (and George Bush II) gave us in the early 2000's.  First, the 15% maximum tax rate on dividends and capital gains will be gone effective January 1st.  Dividends are slated to be taxed as ordinary income, and capital gains taxed at a maximum rate of 20%.  Happy New Year!  So if you own a C corporation that normally pays you dividends, pay yourself as much extra as you can afford in 2012 to get the 15% rate.

Earlier, I mentioned taking capital gains in 2012 when possible.  There are some other implications to this.  Don't sell real estate in 2012 using a 1031 exchange.  You will be exchanging the 15% tax rate for a higher rate in a future year.  If you sold your business in 2012 and will be receiving the payments over a number of years, elect out of the installment method of reporting the income.  Report all of the profit in 2012 and pay the taxes now.  If you are still negotiating the sale, get enough cash in 2012 to pay all of the taxes.  Your wife's fur coat purchase can wait.

The alternative minimum tax (AMT) will cost most of us making more than $200K more.  The exemption and tax rates are going back to 2001 levels.  I expect this to cost me about $12K in additional taxes, if you'd like a look at my personal pain.  I'm so happy to pay for Tiny Tim's health insurance.

Finally, for really high income taxpayers, itemized deductions and personal exemptions will phase out as they did before the Bush tax cuts.  Tax rates will also rise to pre-George W levels.  Running some rough numbers for 2013, I have seen average tax rates for people making over $400K raise by 15% or more.  That is combining all of Santa's goodies that we know he is delivering for 2013 before we even know what new tax legislation he will bring after the new year.

On Thursday night I hit a deer on the way home from work.  I didn't feel at all sad. I hope it was Rudolph.  Given the tax presents the old, fat, eggnog swilling, cookie stealing, red pedophile is bringing me for Christmas this year, I feel justified.  I'll try, and you should too, to hit some more.  If we get all twelve of his antlered buddies, maybe we can stop Christmas from coming,  Yes, I am the Grinch and I approved this message.

As always, thanks for reading.  For real tax and accounting advice, please visit our main S&K web site at www.skcpas.com.  I also publish a business screwup of the day on the "How to Screw Up Your Small Business" Facebook page.  Please like the page.  All proceeds from the page go to the Center for Orphaned Reindeer.  I believe in giving back to the community.

Until next time, let's do it to them (especially reindeer) before they do it to us.