extending the term beyond the upcoming year will defer all the interest income to the end of that term.
Under the original issue discount
(OID) rules, interest paid on a term
of more than one year is considered
available as accrued rather than
when actually paid out.
Tax Strategy
FROM PAGE
16
BLINDSIDED BY AGI
In shifting income, deductions and
credits between tax years as a year-end strategy to even out overall tax
liability between one year and another, a taxpayer should not forget
adjusted gross income (AGI) and
the role it plays in determining
qualification for certain deductions
and credits. Manipulating AGI to
qualify for these benefits in 2011 or
setting the stage to have them available in 2012 should be considered.
Having the size of AGI negate the
tax benefits otherwise so carefully
planned at year-end, on the other
hand, should also be considered a
possibility for those inattentive to
the ability of AGI to blindside expectations.
Some adjusted gross income
phaseout levels to keep in mind
when either accelerating or defer-
ring income include:
Interest exclusion of U.S. savings
bonds. Interest exclusion on U.S.
savings bonds used to pay qualified
higher education expenses begins
to be phased out in 2011 at modi-
fied adjusted gross income (MAGI)
above $71,100 ($106,650 for joint
filers); $72,850 and $109,250, re-
spectively, for 2012.
Student loan interest deduction.
For 2011 and 2012, the above-the-line deduction for student loan interest starts to phase out at MAGI of
$60,000 ($125,000 for joint filers).
Education credits. For 2011 and
2012, the American Opportunity
(Hope) Credit starts to be phased
out at MAGI in excess of $80,000
($160,000 for a joint return). For
2011, the Lifetime Learning Credit
phaseout begins at MAGI in excess
of $51,000 ($102,000 for joint filers);
$52,000 and $104,000, respectively,
for 2012.
Higher education expense de-
duction. Ending in 2011 unless ex-
tended by Congress, a $4,000 max-
imum above-the-line education
expense deduction is available for
taxpayers with MAGI not exceed-
ing $65,000 ($130,000 for joint filer)
and $2,000 for taxpayers with MAGI
exceeding $65,000 and $130,000,
respectively, but less than $80,000
and $160,000, respectively.
in 2010:
▶ Additional Medicare taxes on
earned income (0.9 percent) and
investment income ( 3. 8 percent)
in 2013 on incomes over $200,000
($250,000 joint filers)
▶ A higher medical expense
itemized deduction limit rising to
10 percent in 2013 (up from the cur-
rent 7. 5 percent); and
▶ A $2,500 limit on health Flex-
ible Spending Accounts.
While each of these increases
should be at least noted in 2011
of tax opportunities afforded from
year-end planning makes this time
of year second only to tax filing
season in activity. Being aware of
all the mistakes that can be made
— from misjudging timing rules
and overlooking phaseout levels,
to missing the importance of pend-
ing legislation or legislation with a
sunset or delayed effective date
— is a necessary part of capitalizing
on those opportunities and moving
us all more optimistically into the
New Year. AT
Major changes in the
tax law are likely to
take place in 2013
due to the sunsetting
of the Bush-era tax
rates and the mood
among many in
Congress and on the
campaign trail to
control the deficit.
In addition those taxpayers who
took advantage of a Roth conversion in 2010 that deferred income
into 2011 and 2012 should not forget about the additional income in
2011 that now must be added back.
Certain AGI-dependent deductions
and credits may therefore also be
foreclosed as a result of what had
been considered largely a tax benefit available to 2010 Roth conversions.
LOOKING AHEAD TO 2013
Major changes in the tax law are
likely to take place in 2013 due to
the sunsetting of the Bush-era tax
rates and the mood among many
in Congress and on the campaign
trail to control the deficit. In addi-
tion, three tax increases are already
scheduled to go into effect under
the health care legislation passed
year-end tax planning, the 3. 8 per-
cent tax on investment income has
the most direct impact. Especially
is this the case for investors who
are also threatened by a probable
increase in the maximum rate on
capital gains from its current 15
percent level. Also in play is the fact
that any capital asset purchased af-
ter Dec. 30, 2011 must be held until
Jan. 1, 2013 or beyond to qualify for
a long-term capital gain rate (held
for at least more than one year).
All these factors combine to sug-
gest the some immediate portfolio
reallocations to anticipate selling
in 2012, before rates rise in 2013,
might be in order starting at year-
end 2011.
CONCLUSION
Some practitioners have commented that the growing number
