In 2012, many wealthy taxpayers are looking at the last year of a period of low capital gains rates, qualified dividend treatment and the ability to give away $5 million tax free during their lifetime or at death.

Big changes are afoot in 2013, likewise, for business owners who will see their ability to take large deductions for the cost of capital acquisitions massively reduced next year. All will be looking to their tax advisors for advice and assistance in planning for these changes.

James Duggan, founder and principal attorney at Duggan Bertsch LLC in Chicago, a business, tax, estate and wealth planning law firm, offers a checklist of items that tax advisors can keep in mind as they review the particular needs of their clients this year. 

1. Early Meetings

Encourage clients to meet early in the year, rather than at tax time or year-end. This will give them ample time to review the prior year financials, upcoming year forecast and budgets and to figure out how best to pursue the new year’s objectives from a tax perspective.

2. Capital Gains Transactions

Consider with clients who have a significant unrealized capital gain whether they should sell those assets and realize the gain this year while the long-term capital gains rate is set at 15%. In 2013, that rate is scheduled to increase to 20%. In addition, for clients who own businesses or stock positions that they intended to sell within the next one-to-three years, it may be best to push for that sale to occur in 2012 while the 15% rate still pertains.

NYSE traders (Photo: AP)3. Dividends in 2012

Work with clients who have built up corporate profits to devise a plan to maximize dividends this year when they can still benefit from “qualified dividend” treatment, which means corporate dividends are taxed at capital gain rate of 15%. In 2013, that beneficial rate is scheduled to expire and dividends will be taxed as ordinary income at the higher graduate rates, with the top bracket scheduled to be 39.6%.

4. Annual Gifts

Help clients avoid the common mistake of waiting until year-end to make “annual exclusion” gifts of $13,000. A gift early in the year gives their chosen recipient not only the principal but also any appreciation tied to the asset during the year.

5. Lifetime Gifts

The window on the $5 million tax-free exclusion gift is set to expire at the end of this year. It will revert to $1 million in 2013. For clients who intend to make such a sizable transfer, planning is critical to determine and implement the optimal method of transfer.

6. Retirement Plan Contributions

Urge clients who failed to give the maximum amount to their retirement plans in 2011 to shore up those desired contributions while there is still time in 2012–until April 17 (extended two days because April 15 falls on Sunday and the next day is a holiday in the District of Columbia) for IRAs, SEPs and Keogh plans.

7. Private Placement Insurance Portfolio

Have clients with tax-inefficient portfolio assetsincluding large amounts of short-term gain and income generationconsider investing in such asset classes through a private placement insurance policy. The PPLI structure can provide tax-free growth, tax-free access via loans and tax-free income upon death.

8. 179 Deduction

Remind clients who own businesses that 2012 is a good year to maximize their capital acquisitions because Section 179 of the Tax Code allows them to fully deduct, rather than depreciate, the cost of machinery, equipment, vehicles, furniture and other qualifying property placed in service during the year up to $125,000. In 2013, this depreciation exception will plummet to $25,000.

9. Bonus Depreciation

Business owners will also want to take advantage of the so-called bonus depreciation this year by maximizing capital expenditures. The law currently allows an upfront deduction equal to 50% of the purchase price of new property and equipment. The bonus depreciation is scheduled to be eliminated in 2013.

10. Captive Insurance Company

Explore with clients who have private businesses, higher income and material risks for insurance purposes the formation of their own captive insurance company. Properly structured, this would allow the client to pay his or her own company for insurance rather than a third-party provider. The premium payment would be fully deductible, the premium income would be received tax-free to the client’s insurance company and strong internal underwriting could lead to significant additional profit each year.

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