As a result of the higher tax rates and new taxes mandated by the American Taxpayer Relief Act of 2012 and the Affordable Care Act, tax planning is more important than ever. Multiple-year tax planning is especially valuable if your income includes stock-based compensation, since you can control the timing of sales and option exercises and you know when restricted stock/RSUs will vest. Have you started your personal tax planning?

The American Taxpayer Relief Act of 2012 and the Affordable Care Act will increase the tax liability of nearly every taxpayer with yearly income greater than $200,000/$250,000 for single and joint filers. The increased tax expense is a result of the following:

• A new top nominal tax bracket for taxpayers whose yearly income exceeds $400,000/$450,000 from 35% to 39.6%;
• The return of phase outs for itemized and personal exemptions for taxpayers whose adjusted gross income exceeds $250,000/$300,000 (i.e., itemized deductions will be reduced by 3% for amounts over the threshold and personal exemptions will be reduced by 2%);
• A new Medicare payroll tax of 0.9% on yearly income that exceeds $200,000/$250,000 (NOTE this new tax will apply to the income from non-qualified stock option exercises, the vesting of restricted stock/RSUs and performance shares, and purchases in non-qualified ESPP as well as typical wages and bonuses that cause income to exceed the threshold);
• A new 3.8% Medicare surtax on all net investment income for taxpayers whose income exceeds $200,000/$250,000 (NOTE this new tax will apply to gains realized from sales of stock after exercise, purchase or vesting); and
• Capital gains tax rate increases to 20% for taxpayers whose adjusted gross income exceeds $400,000/$450,000.

As the preceding tax rates indicate, the effect on your tax liability will depend on your income level. High-income taxpayers, particularly ones near the threshold limits, will benefit greatly from tax planning and tax planning strategies that:

• Defer income into the future with restricted stock units and performance units that allow the deferral of share delivery;
• Defer salary and bonus in non-qualified deferred compensation plans; and
• Receive stock options, as options offer the ability to time the year for recognizing income, depending on when you exercise them.

These strategies focus on keeping yearly income under the various thresholds and recognizing income in future years when income and rates may be lower.

Don’t delay!  The time to start tax planning is today, before year-end.  Contact Flexible Accounting Services of the Triangle today and let us assist you in lowering your tax bill by creating a tax plan for your personal situation.