November and December is when I normally start sitting down with my clients to talk about what they can do at the end of the year to minimize or defer their taxes. Everyone’s tax situation is going to be different so the meetings are tailored to the clients but here are some general themes that will come up and that you can use in a discussion with you tax professional. Keep in mind that a lot of this could change depending on which way the elections go.
1) Do you pay less now or potentially more later? Right now, the long term capital gains rate is 15% for those in the top tax brackets. If Congress does nothing, that rate is going to go up to 20%. If you’re looking to sell a long term asset, you have a decision to make. You can sell now and pay the 15% rate, or you can hold off, pay later but pay at the higher 20% rate.
2) What should I do with my dividend paying stocks? Right now, dividends are taxed at the long term capital gains rate which maxes out at 15%. If nothing is done, that rate could go up to as high as 39.6% depending on your marginal rate. While this could affect what corporations do, if you have large holdings in dividend paying stocks, you’re going to see your tax bill go up if you don’t make any adjustments. Also keep in mind that you’re going to have to pay medicare tax on unearned income if you’re over a certain threshold ($200,000 if you’re single, $250,000 if you’re married) so you also have to take that into account.
3) What if I have my own C-Corporation? If you have your own C-Corporation and you have some excess cash you might want to consider flushing out as a distribution. You’re probably not going to see rates any lower then 15% and you might even combine this with an S-Corporation election in 2013. This would also apply if you have an S-Corporation and you have some C-Corporation earnings and profits that you want to get out before rates go up.
4) Expect your payroll taxes to go up. A big deal last year, it looks like the payroll tax cut isn’t going to be extended. If you have your own business where you pay yourself a salary, it might be worth looking into whether you can justify a lower one.
As always, this is general information and you should be discussing these matters with a professional.