It's Tax Planning Time Again

My latest Kiplinger letter was a usual treasure trove of important tax info.  Their analysis of both the Obama and Romney plans for high earning individuals is bleak.   Their take is regardless of who wins the election folks who make more than $200Ka year are going to pay more in taxes.  While this isn’t exactly a shocker it’s worth paying attention to the fact that “simplifying the tax code” is double speak for “you’ll end up paying more in the end if you’re considered a high earner”. 

That was the bad news.  The good news is now is the time to act on year end planning moves.  While there are still many 2012 tax extenders at risk there are business spending choices that if made in the next few months can save you money.  

Asset purchase and use by the end of the year qualifies for lots of deductions.  First you get bonus deprecation (up to 50% of the asset value) and it’s not pro-rated even if you put the asset in service between Christmas and New Year’s.  The asset does have to be new, and have a useful life of 20 years or less.  In addition, companies can expense up to $139,000 of assets put to use this year.  So if you take the bonus and the expensing, you’re off to a really good start. (Kiplinger predicts the bonus will go away after this year, but thinks the cap on expensing assets will go up.)  Cavet emptor if the equipment you are buying is a vehicle.  Deductions are limited if the loaded weight is less than 6,000 pounds.

There are a number of reasons to be strategic with these deductions that let you recognize the cost of capital equipment right away.  First of all if you expense too much now, you may be putting yourself in a position where next year’s tax bill will contain sticker shock.  It’s especially difficult if you’ve financed the equipment, so you’re paying the loans off, but you already took the deduction.  Also, if you buy more than 40% of your assets after September your depreciation gets figured on a pro rata basis, so there’s less bang for the spending buck in the current year. 

If this all sounds too dense, it’s because it is.  Please let me be clear that simplifying the tax code would be a good thing. It’s just that it should be done to simplify, not to obfuscate.  This is also a reminder that these “tips” are complex enough to require a conversation about your personal tax situation to really make sure they will work as intended in your case.