Making the Deadline

We mailed the 2011 tax returns to the Internal Revenue Service and Franchise Tax Board a few days before the final extension deadline of October 15th. (Some 2011 K-1 forms weren't received until August, and yes, we could have pushed ourselves to finish the task in September.)

Income was down a little, but the main reason each return has shrunk to about 40 pages each (from last year's 46 pp) is that simplification of our financial affairs has proceeded apace. We've consolidated accounts to a handful of financial institutions and have gotten rid of some small investments and ventures that were costly--more in time than money--to maintain. Cleaning up physical clutter can be a happiness booster; clearing financial clutter, less outwardly visible in the digital age, reduces stress.

With hardly a break we must needs turn our attention to 2012. The high probability that certain tax deductions will be eliminated has caused tax planners to recommend accelerating deductions, if possible, to 2012:

Some possible moves: accelerating state income- and property-tax payments; paying medical-insurance premiums or other deductible costs, if they are large enough to surmount the 7.5% hurdle; and making large purchases if you will be deducting state sales tax from your federal return, assuming Congress renews this break for 2012.

Adding to the confusion, tax planners are also advocating accelerating income to 2012 before rates rise. For most of us this means selling appreciated stock in 2012 (if we were planning on doing so anyway in the next few years and if we're lucky enough to own such stock).

Tax cuts enacted during the George W. Bush Administration are due to expire at the end of 2012. The current 15% tariff on capital gains could rise to 20% in 2013, barring an extension from Congress. Depending on who controls the White House and Congress after the election in November, rates could go even higher.

Another reason to sell stock now is that next year there will be an additional 3.8% "Medicare contribution" tax imposed on investment income--which includes capital gains--for high income taxpayers.

the maximum federal rate on long-term gains for 2013 and beyond will actually be 23.8% (versus the current 15%)....The additional 3.8% Medicare tax will not apply unless your adjusted gross income (AGI) exceeds: (1) $200,000 if you're unmarried, (2) $250,000 if you're a married joint-filer, or (3) $125,000 if you use married filing separate status.

The experts seem to be saying that we should accelerate income and deductions to this year, which is a little like stepping on the gas and brake pedals at the same time. Those simultaneous actions would wear out a car, and it's not surprising that confused suffering taxpayers feel worn out, too. © 2012 Stephen Yuen