After weeks of negotiating that, at times, looked as though it would accomplish nothing, Congress finally agreed on legislation to avoid the tax part of the “fiscal cliff.” In the early morning hours of January 1, 2013, the Senate passed the American Taxpayer Relief Act of 2012, sending the bill to the House where it was passed later that day. President Obama signed the bill into law on January 2.

The new law keeps the Bush-era tax cuts for the majority of taxpayers, but adds a 39.6% tax bracket for singles with income in excess of $400,000 and couples with income over $450,000. The law permanently “fixes” the alternative minimum tax and permanently sets the estate tax top rate at 40% with an exemption of $5,000,000. Capital gains and dividends will continue to be taxed at 2012 rates, except for a higher 20% rate on higher-income taxpayers. The law did not extend the “payroll tax holiday,” so social security taxes withheld from paychecks will now be at a 6.2% rate, rather than at the 2012 level of 4.2%.

A new year and new tax legislation always provide fresh opportunities for tax planning. This New Year Letter serves as a reminder of our commitment to help you minimize your taxes. We hope you find the Letter informative and helpful. Please contact us if we can assist you in your planning and in meeting your tax filing obligations.

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Taxes are going to be a major issue for the rest of 2012 and for much of 2013. On January 1, 2013, the country faces what Federal Reserve Chairman Ben Bernanke has called a “fiscal cliff,” resulting from the expiration of the Bush-era tax cuts and the automatic across-the-board cuts in government spending. Added to these events is the uncertainty over the alternative minimum tax and the tax breaks known collectively as the “tax extenders.”

There is no way to predict what Congress will do about these issues or when they will act. That uncertainty makes doing effective tax planning for yourself and your business very challenging. Yet doing nothing could leave you paying significantly more in taxes.

This year, the wise taxpayer may have to consider more than one tax strategy, running the numbers under two or more scenarios. By staying informed and being prepared to act as events unfold, you can minimize your 2012 and 2013 tax liability. This Letter is intended to encourage you to make 2012 year-end planning a priority. We are committed to helping you analyze the tax-cutting options best suited to your particular circumstances. If you have questions or if you would like to arrange a year-end tax review, please contact our office.

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Instead of tackling the hard issues of tax reform, entitlements, and the staggering federal debt, politicians in Washington settled for a lot of talk and less action in 2010. It’s no surprise that the problems are still with us, and because we’re coming up to an election year in 2012, it’s unlikely that anything will be resolved until after the election.

The Tax Relief Act of 2010 did bring some tax relief in the form of a 2% reduction in social security taxes. This one-year tax cut will reduce 2011 taxes by an estimated $100 billion. Other provisions in the 2010 law will expire at the end of 2012, and the general expectation is that taxes will then increase, if not for everyone, at least for those with incomes in and above the $250,000 range.

The tax code is long and complicated. According to Nina Olson, the national taxpayer advocate, there have been 4,428 changes to the tax code over the past ten years. That’s more than one change per day. It can be difficult to keep up with the tax rules and tax-cutting options. This Letter is our way of reminding you that it’s time to put your 2011 tax planning into high gear, or you may find yourself paying higher taxes than necessary. Please contact our office if you would like to do a midyear tax review to minimize your taxes for 2011 and beyond.

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There are several tax breaks slated to end after this year. As you review your tax situation at midyear, look over the following items to see if you can take advantage of any of them to lower your 2011 tax bill:

-the option for deducting state and local sales taxes in lieu of deducting state and local income taxes.
-the above-the-line deduction of up to $4,000 for higher education expenses.
-the above-the-line deduction of up to $250 for classroom supplies purchased by teachers.
-the option for taxpayers 70½ or older to make tax-free contributions of up to $100,000 from an IRA to charity.

Also, don’t forget to check your exposure to the alternative minimum tax (AMT) for 2011. The Tax Relief Act of 2010 increased the AMT exemption amount for 2011 to $48,450 for single taxpayers and to $74,450 for couples. The AMT is a separate tax calculation originally designed to apply only to the wealthy. In recent years, the AMT has begun to hit even middle-income taxpayers.

Finally, call us to schedule a midyear review to discuss the best 2011 tax-saving strategies for your individual situation. We can’t slow the speed of time, but we can help you plan to make the most of it.