1. 2012-2013
Tax Planning Guide
Year-round strategies to make the tax laws work for you
Serving the Pacific Northwest for over 75 years providing assurance, tax and consulting services
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3. DEDUCTIONS & AMT Click here 2
F A M I LY & E D U C A T I O N Click here 4
INVESTING 6
Click here
BUSINESS 8
Click here
RETIREMENT 12
Click here
ESTATE PLANNING Click here 14
TAX RATES Click here 16
In these uncertain times, planning
is more important than ever
Minimizing taxes is never easy. But in times of legislative and economic uncertainty, it can be a real challenge.
As of this writing, the lower tax rates currently in effect are scheduled to expire at the end of 2012. Whether
they’ll be extended, raised or changed in some other way is anyone’s guess.
This means you’ll need to base your tax plan on the way things are now but be ready to revise it in a flash if
Congress makes significant tax law changes before year end. The more you know about the areas subject to
change, and the more familiar you are with various tax planning strategies, the easier it will be to determine
your best course of action.
This guide is intended to help you do exactly that. But we don’t have room here to cover all strategies that
may apply to your situation. So please check with your tax advisor to find out the latest information and the
best ways to minimize your tax liability for 2012 and beyond.

4. DEDUCTIONS & AMT
Rising rates and expiring breaks complicate tax planning
Deductions are more powerful when tax rates are higher because they
save tax at that higher rate — a $1,000 deduction saves you $280 when
your tax rate is 28% but $310 when your tax rate is 31%. With tax rates,
as of this writing, scheduled to rise in 2013, you may want to defer, where
possible, incurring deductible expenses to next year, when they might save
more tax. But the tax advantage could be reduced or eliminated by the
expiration of certain tax breaks. An income-based phaseout limiting the
benefit of many deductions, for example, is scheduled to return for 2013.
Yet it’s possible that lower rates and various breaks could be extended. So
planning for deductions is especially complicated this year.
The AMT Charitable donations sold the property. Warning: Donations
When planning for deductions, the Donations to qualified charities are gen- of such property are subject to tighter
first step is to consider the alternative erally fully deductible for both regular deduction limits. Excess contributions can
minimum tax (AMT) — a separate tax tax and AMT purposes, and they may be be carried forward for up to five years.
system that limits some deductions and the easiest deductible expense to time to CRTs. For a given term, a charitable
doesn’t permit others, such as: your tax advantage. After all, you control remainder trust pays an amount to
exactly when and how much you give. you annually (some of which may be
n
State and local income tax
For large donations, discuss with your taxable). At the term’s end, the CRT’s
deductions,
tax advisor which assets to give and the remaining assets pass to one or more
n
Property tax deductions, and best ways to give them. For example: charities. When you fund the CRT, you
n
Miscellaneous itemized deductions
Appreciated assets. Publicly traded stock receive an income tax deduction. If you
subject to the 2% of adjusted gross contribute appreciated assets, you also
and other securities you’ve held more
income (AGI) floor, including invest- may be able to minimize and defer capi-
than one year are long-term capital gains
ment expenses and unreimbursed tal gains tax. You can name someone
property, which can make one of the best
employee business expenses. other than yourself as income benefi-
charitable gifts. Why? Because you can
You must pay the AMT if your AMT deduct the current fair market value and ciary or fund the CRT at your death, but
liability exceeds your regular tax liability. avoid the capital gains tax you’d pay if you the tax consequences will be different.
(See Chart 7 on page 16 for AMT rates
and exemptions.) You may be able to
time income and deductions to avoid CHART 1 Scheduled ordinary income tax rate increases
the AMT, reduce its impact or even take
advantage of its lower maximum rate. 2012 rate 2013 rate1
But, such planning will be a challenge
10% 15%
until Congress passes long-term relief.
15% 15%
Unlike the regular tax system, the AMT
system isn’t regularly adjusted for infla- 25% 28%
tion. Instead, Congress must legislate any
28% 31%
adjustments. Typically, it has done so via
an increase in the AMT exemption. Such 33% 36%
a “patch” was in effect for 2011, but, as
35% 39.6%
of this writing, Congress hasn’t passed
a patch for 2012. (Check with your tax ssuming legislation isn’t signed into law extending lower rates or making other rate
1
A
changes. Contact your tax advisor for the latest information.
advisor for the latest information.)

5. DEDUCTIONS AMT 3
Home-related breaks
Medical expense deduction
These valuable tax breaks go beyond WHAT’S NEW!
floor scheduled to rise in 2013
just deductions:
Who’s affected: Taxpayers who incur medical expenses.
Property tax deduction. Before paying
your bill early to accelerate the itemized Key changes: Currently, if your eligible medical expenses exceed 7.5% of
deduction into 2012, review your AMT your adjusted gross income (AGI), you can deduct the excess amount. But in
situation. If you’re subject to the AMT, 2013, the 2010 health care act increases this “floor” to 10% for taxpayers
you’ll lose the benefit of the deduction under age 65.
for the prepayment. Eligible expenses can include health insurance premiums, medical and dental
Mortgage interest deduction. You services and prescription drugs. Expenses that are reimbursed (or reimbursable)
generally can deduct interest on up to by insurance or paid through a tax-advantaged health care account aren’t eligible.
a combined total of $1 million of mort- Planning tips: Consider “bunching” nonurgent medical procedures and other
gage debt incurred to purchase, build controllable expenses into one year to exceed the AGI floor. Bunching expenses
or improve your principal residence and into 2012 may be especially beneficial because of the scheduled floor increase.
a second residence. Points paid related But keep in mind that, for alternative minimum tax purposes, the 10% floor
to your principal residence also may be already applies. Also, if tax rates go up in 2013 as scheduled, your deductions
deductible. might be more powerful then. Finally, be aware that the floor increase could be
Home equity debt interest deduction. repealed by Congress.
Interest on home equity debt used to
improve your principal residence — and joint filers) of gain if you meet certain the latest information.) When available,
interest on home equity debt used for any tests. Warning: Gain that’s allocable to the deduction can be valuable to tax-
purpose (debt limit of $100,000) — may a period of “nonqualified” use generally payers who reside in states with no or
be deductible. So consider using a home isn’t excludible. low income tax or who purchase major
equity loan or line of credit to pay off items, such as a car or boat.
Home sale loss deduction. Losses on
credit cards or auto loans, for which inter-
the sale of a principal residence aren’t
est isn’t deductible. Warning: Beware of Saving for health care
deductible. But if part of your home is
the AMT — if the home equity debt isn’t Here are two tax-advantaged vehicles
rented or used exclusively for your busi-
used for home improvements, the interest you should consider if available to you:
ness, the loss attributable to that portion
isn’t deductible for AMT purposes.
will be deductible, subject to various 1. HSA. If you’re covered by qualified
Home office deduction. If your use limitations. high-deductible health insurance, a
of a home office is for your employer’s Health Savings Account allows contribu-
Debt forgiveness exclusion. Home-
benefit and it’s the only use of the space, tions of pretax income (or deductible
owners who receive debt forgiveness
you generally can deduct a portion of after-tax contributions) up to $3,100
in a foreclosure, short sale or mortgage
your mortgage interest, real estate taxes, for self-only coverage and $6,250 for
workout for a principal residence gener-
insurance, utilities and certain other family coverage (for 2012). Account
ally don’t have to pay federal income
expenses, as well as the depreciation holders age 55 and older can contribute
taxes on that forgiveness. Warning: As
allocable to the office space. You can an additional $1,000.
of this writing, this break is scheduled to
also deduct direct expenses, such as
expire after 2012. HSAs bear interest or are invested and
business-only phone lines.
can grow tax-deferred similar to an
Rental income exclusion. If you rent
You must claim these expenses as a IRA. Withdrawals for qualified medical
out all or a portion of your principal
miscellaneous itemized deduction, expenses are tax-free, and you can carry
residence or second home for less than
which means you’ll enjoy a tax ben- over a balance from year to year.
15 days, you don’t have to report the
efit only if your home office expenses
income. But expenses associated with 2. FSA. You can redirect pretax income to
plus your other miscellaneous itemized
the rental won’t be deductible. an employer-sponsored Flexible Spending
expenses exceed 2% of your AGI. If,
Account up to an employer-determined
however, you’re self-employed, you
Sales tax deduction limit (not to exceed $2,500 for plan
can use the deduction to offset your
The break allowing you to take an item- years beginning in 2013). The plan pays
self-employment income and the 2%
ized deduction for state and local sales or reimburses you for qualified medical
of AGI “floor” won’t apply.
taxes in lieu of state and local income expenses. What you don’t use by the end
Home sale gain exclusion. When you taxes was available for 2011 but, as of of the plan year, you generally lose. If
sell your principal residence, you can this writing, hasn’t been extended for you have an HSA, your FSA is limited to
exclude up to $250,000 ($500,000 for 2012. (Check with your tax advisor for funding certain “permitted” expenses. w

6. F A M I LY E D U C A T I O N
Green your family tree with these tax-saving opportunities
Many ways to save tax dollars are available to parents, students and
even grandparents. So take advantage of the deductions, credits and
tax-advantaged savings opportunities available to you and your family.
Also be aware that certain breaks will become less beneficial in 2013
if Congress doesn’t take action to extend the enhancements currently
in effect.
Child and adoption credits IRAs for teens or she will gain no benefit from the abil-
Tax credits reduce your tax bill dollar- IRAs can be perfect for teenagers because ity to deduct a traditional IRA contribu-
for-dollar, so make sure you’re taking they likely will have many years to let their tion. (For more on IRAs, see page 12.)
every credit you’re entitled to. For each accounts grow tax-deferred or tax-free. If your children or grandchildren don’t
child under age 17 at the end of the The 2012 contribution limit is the lesser want to invest their hard-earned money,
year, you may be able to claim a $1,000 of $5,000 or 100% of earned income. consider giving them the amount they’re
child credit. If you adopt in 2012, you Traditional IRA contributions generally eligible to contribute — but keep the
may qualify for an adoption credit or an are deductible, but distributions will be gift tax in mind. (See page 14.) If they
employer adoption assistance program taxed. On the other hand, Roth IRA don’t have earned income and you own
income exclusion; both are $12,650 per contributions aren’t deductible, but a business, consider hiring them. As the
eligible child. qualified distributions will be tax-free. business owner, you can deduct their
Warning: These credits phase out for Choosing a Roth IRA is a no-brainer if a pay, and other tax benefits may apply.
higher-income taxpayers. (See Chart 2.) teen doesn’t earn income that exceeds Warning: Your children must be paid
the standard deduction ($5,950 for in line with what you’d pay nonfamily
Child care expenses 2012 for single taxpayers), because he employees for the same work.
A couple of tax breaks can help you
offset these costs:
Tax credit. For children under age 13
or other qualifying dependents, you
may be eligible for a credit for a por-
tion of your dependent care expenses.
Eligible expenses are limited to $3,000
for one dependent and $6,000 for two
or more. Income-based limits reduce the
credit but don’t phase it out altogether.
(See Chart 2.)
FSA. You can contribute up to $5,000
pretax to an employer-sponsored child
and dependent care Flexible Spending
Account. The plan pays or reimburses you
for these expenses. You can’t use those
same expenses to claim a tax credit.

7. F A M I LY E D U C A T I O N 5
precollege expenses will be taxable
2012 family and education
CHART 2 starting in 2013. Additionally, the annual
tax breaks: Are you eligible?
ESA contribution limit per beneficiary is
Modified adjusted gross only $2,000 through 2012, and it will
Tax break income phaseout range go down to $500 for 2013 if Congress
Single filer Joint filer doesn’t act. Contributions are further
limited based on income. (See Chart 2.)
Child credit 1
$ 75,000 – $ 95,000 $ 110,000 – $ 130,000
Adoption credit $ 189,710 – $ 229,710 $ 189,710 – $ 229,710 Generally, contributions can be made
Child or dependent care credit2 $ 15,000 – $ 43,000 $ 15,000 – $ 43,000 only for the benefit of a child under
age 18. Amounts left in an ESA when
ESA contribution $ 95,000 – $ 110,000 $ 190,000 – $ 220,000
the beneficiary turns age 30 generally
American Opportunity credit $ 80,000 – $ 90,000 $ 160,000 – $ 180,000
must be distributed within 30 days, and
Lifetime Learning credit $ 52,000 – $ 62,000 $ 104,000 – $ 124,000 any earnings may be subject to tax and
Student loan interest deduction $ 60,000 – $ 75,000 $ 125,000 –$ 155,000 a 10% penalty.
1
ssumes one child. The phaseout end is higher for families with more than one eligible child.
A
2
he phaseout is based on AGI rather than MAGI. The credit doesn’t phase out altogether,
T Education credits
but the minimum credit percentage of 20% applies to AGIs above $43,000. and deductions
If you have children in college now, are
The “kiddie tax” n
The plans typically offer high con- currently in school yourself or are paying
The income shifting that once — when tribution limits, and there are no off student loans, you may be eligible
the “kiddie tax” applied only to those income limits for contributing. for a credit or deduction:
under age 14 — provided families with n
There’s generally no beneficiary age
American Opportunity credit. This tax
significant tax savings now offers much limit for contributions or distributions.
break covers 100% of the first $2,000
more limited benefits. Today, the kiddie n
You remain in control of the of tuition and related expenses and
tax applies to children under age 19 account — even after the child is 25% of the next $2,000 of expenses.
as well as to full-time students under of legal age. The maximum credit, per student, is
age 24 (unless the students provide
n
You can make rollovers to another $2,500 per year for the first four years of
more than half of their own support
qualifying family member. postsecondary education. Warning: The
from earned income).
n
The plans provide estate plan­- credit is scheduled to revert to the less
For children subject to the kiddie tax, any ning benefits: A special break for beneficial Hope credit after 2012 but
unearned income beyond $1,900 (for 529 plans allows you to front-load may be extended.
2012) is taxed at their parents’ marginal five years’ worth of annual gift tax Lifetime Learning credit. If you’re pay-
rate rather than their own, likely lower, exclusions and make a $65,000 ing postsecondary education expenses
rate. Keep this in mind before transfer- contribution (or $130,000 if you beyond the first four years, you may be
ring income-generating assets to them. split the gift with your spouse). eligible for the Lifetime Learning credit
The biggest downsides may be that your (up to $2,000 per tax return).
Saving for education
investment options — and when you Tuition and fees deduction. If you
If you’re saving for education, there
can change them — are limited. don’t qualify for one of the credits
are two tax-advantaged vehicles you
should consider: 2. ESAs. Coverdell Education Savings because your income is too high, you
Account contributions aren’t deductible might be eligible to deduct up to $4,000
1. Section 529 plans. You can choose
for federal purposes, but plan assets can of qualified higher education tuition
a prepaid tuition program to secure
grow tax-deferred and distributions used and fees — if this break is extended for
current tuition rates or a tax-advantaged
to pay qualified education expenses are 2012. (Check with your tax advisor for
savings plan to fund college expenses:
income-tax-free. the latest information.)
n
Contributions aren’t deductible for
Perhaps the biggest ESA advantage Student loan interest deduction. If
federal purposes, but plan assets
is that you have direct control over you’re paying off student loans, you
can grow tax-deferred.
how and where your contributions are may be able to deduct up to $2,500
n
Distributions used to pay qualified of interest (per tax return).
invested. Another advantage is that
expenses (such as tuition, man-
tax-free distributions aren’t limited to Warning: Income-based phaseouts
datory fees, books, equipment,
college expenses; they also can fund apply to these breaks (see Chart 2),
supplies and, generally, room and
elementary and secondary school costs. and expenses paid with 529 plan or
board) are income-tax-free for
federal purposes and may be tax- However, if Congress doesn’t extend ESA distributions can’t be used to
free for state purposes. this treatment, distributions used for claim them. w

8. INVESTING
Time to take another look at the
impact of taxes on your portfolio
When it comes to investing, the focus is often on returns — without regard
to their potential tax impact. Because tax rates have been relatively low for
the past several years, it’s not surprising that there’s been more focus on
stock market volatility and low interest rates than on tax consequences.
But, as of this writing, tax rates are scheduled to increase next year, so it’s
time to take another look at the impact of taxes on your portfolio.
Capital gains tax and timing Warning: You have only through 2012 Avoid wash sales. If you want to
Although time, not timing, is generally to take advantage of the 15% rate, achieve a tax loss with minimal change
the key to long-term investment success, unless Congress extends it. (See “What’s in your portfolio’s asset allocation, keep
timing can have a dramatic impact on new!” below.) in mind the wash sale rule. It prevents
the tax consequences of investment you from taking a loss on a security if
Here are some other tax-saving strate-
activities. The 15% long-term capital you buy a substantially identical security
gies related to timing:
gains rate is 20 percentage points lower (or option to buy such a security) within
than the highest ordinary-income rate of Use unrealized losses to absorb 30 days before or after you sell the
35%. It generally applies to investments gains. To determine capital gains tax security that created the loss. You can
held for more than 12 months. (Higher liability, realized capital gains are netted recognize the loss only when you sell
long-term gains rates apply to certain against any realized capital losses. If the replacement security.
types of assets — see Chart 3.) you’ve cashed in some big gains during
Fortunately, there are ways to avoid
the year and want to reduce your 2012
Holding on to an investment until triggering the wash sale rule and still
tax liability, before year end look for
you’ve owned it more than a year may achieve your goals. For example, you can
unrealized losses in your portfolio and
help substantially cut tax on any gain. immediately buy securities of a different
consider selling them to offset your gains.
company in the same industry or shares in
a mutual fund that holds securities much
Low capital gains and qualified-dividend
WHAT’S NEW! like the ones you sold. Or, you may wait
rates set to expire Dec. 31
31 days to repurchase the same security.
Who’s affected: Investors holding appreciated or dividend-producing assets. Alternatively, before selling the security,
you can purchase additional shares of that
Key changes: As of this writing, the 15% long-term capital gains rate is scheduled
security equal to the number you want to
to return to 20% in 2013. The 15% rate also applies to qualified dividends, and
sell at a loss, and then wait 31 days to sell
in 2013 these dividends are scheduled to return to being taxed at your marginal
the original portion.
ordinary-income rate — which likely is also scheduled to increase. (See Chart 1 on
page 2.) It’s possible, however, that Congress will extend the lower rates or make Swap your bonds. With a bond swap,
other rate changes. (Check with your tax advisor for the latest information.) you sell a bond, take a loss and then
immediately buy another bond of similar
Planning tips: If as year end approaches it’s looking like tax rates will increase next
quality and duration from a different
year, consider whether, before year end, you should sell highly appreciated assets
issuer. Generally, the wash sale rule
you’ve held long term. It may make sense to recognize gains now rather than risk
doesn’t apply because the bonds aren’t
paying tax at a higher rate next year. If you hold dividend-producing investments,
considered substantially identical. Thus,
consider whether you should make any adjustments to your portfolio in light of the
you achieve a tax loss with virtually no
higher tax rate that may apply to dividends in 2013.
change in economic position.

9. INVESTING 7
ordinary-income rates. So, in terms of
CHART 3 What’s the maximum capital gains tax rate? income investments, stocks that pay
qualified dividends may be more attrac-
Maximum tax rate for assets held 2012 20131 tive tax-wise than, for example, CDs or
money market accounts. But nontax
12 months or less (short term) 35% 39.6%
issues must be considered as well, such
More than 12 months (long term) 15% 20% as investment risk and diversification.
Some key exceptions Bonds. These also produce interest
income, but the tax treatment varies:
Long-term gain on collectibles, such as artwork
28% 28%
and antiques n
Interest on U.S. government bonds is
taxable on federal returns but gener-
Long-term gain attributable to certain recapture
25% 25% ally exempt on state and local returns.
of prior depreciation on real property
n
Interest on state and local govern-
Long-term gain that would be taxed at 15% or ment bonds is excludible on federal
0% 10%
less based on the taxpayer’s ordinary-income rate returns. If the bonds were issued in
1
ssuming legislation isn’t signed into law extending lower rates or making other rate changes.
A your home state, interest also may
Contact your tax advisor for the latest information. be excludible on your state return.
n
Tax-exempt interest from certain
Mind your mutual funds. Mutual business that might generate substan-
private-activity municipal bonds can
funds with high turnover rates can tial future capital gains. They’ll be even
trigger or increase the alternative
create income that’s taxed at ordinary- more powerful if rates go up in 2013.
minimum tax (AMT, see page 2) in
income rates. Choosing funds that
But if you don’t expect substantial future some situations.
provide primarily long-term gains can
gains, it could take a long time to fully n
Corporate bond interest is fully tax-
save you more tax dollars because of
absorb a large loss carryover. So, from able for federal and state purposes.
the lower long-term rates.
a tax perspective, you may not want to n
Bonds (except U.S. savings bonds)
See if a loved one qualifies for the sell an investment at a loss if you won’t
with original issue discount (OID)
0% rate. The long-term capital gains have enough gains to absorb most of it.
build up “interest” as they rise
rate is 0% for gain that would be taxed (Remember, however, that capital gains
toward maturity. You’re generally
at 10% or 15% based on the taxpayer’s distributions from mutual funds can also
considered to earn a portion of
ordinary-income rate. If you have adult absorb capital losses.) Plus, if you hold
that interest annually — even
children in one of these tax brackets, on to the investment, it may recover the
though the bonds don’t pay this
consider transferring appreciated assets lost value.
interest annually — and you must
to them so they can enjoy the 0% rate.
Nevertheless, if you’re ready to divest pay tax on it.
Warning: The 0% rate is scheduled to yourself of a poorly performing invest-
Stock options. Before exercising (or
expire after 2012, so you may want to ment because you think it will continue to
postponing exercise of) options or selling
act soon. Also, if the child will be under lose value — or because your investment
stock purchased via an exercise, consult
age 24 on Dec. 31, first make sure he objective or risk tolerance has changed —
your tax advisor about the complicated
or she won’t be subject to the “kiddie don’t hesitate solely for tax reasons.
rules that may trigger regular tax or
tax.” (See page 5.) Finally, consider any
AMT liability. He or she can help you
gift tax consequences. (See page 14.) Beyond gains and losses
plan accordingly. w
With some types of investments, you’ll
Loss carryovers have more tax consequences to consider
If net losses exceed net gains, you can than just gains and losses:
deduct only $3,000 ($1,500 for married
Dividend-producing investments.
taxpayers filing separately) of the net
Currently, qualified dividends are
losses per year against ordinary income
subject to the same 15% rate (or 0%
(such as wages, self-employment and
rate for taxpayers in the 10% or 15%
business income, and interest).
ordinary-income bracket) that applies to
You can carry forward excess losses long-term capital gains. Warning: This
indefinitely. Loss carry­ vers can be a
o tax treatment is scheduled to change in
powerful tax-saving tool in future years 2013. (See “What’s new!” at left.)
if you have a large investment portfolio,
Interest-producing investments.
real estate holdings or a closely held
Interest income generally is taxed at

10. BUSINESS
Boost your bottom line by reducing taxes
It’s not how much money your business makes that really matters, but how
much money it keeps. And taxes can take a large bite out of your bottom
line. To boost it, reduce your taxes by using all the breaks available to you.
Unfortunately, many breaks have expired or become less powerful this year.
Still, there are plenty of opportunities out there, and, with smart planning,
you can make the most of them.
Projecting income Taking the opposite approach. If it’s cost of purchasing such assets as equip-
Projecting your business’s income for likely you’ll be in a higher tax bracket ment, furniture and off-the-shelf com-
this year and next will allow you to next year, accelerating income and defer- puter software. For 2012, the expensing
time income and deductions to your ring deductible expenses may save you limit is $139,000. The break begins to
advantage. It’s generally — but not more tax. Warning: Individual income phase out dollar-for-dollar when total
always — better to defer tax, so consider: tax rates are scheduled to go up in 2013. asset acquisitions for the tax year exceed
(See Chart 1 on page 2.) So if your busi- $560,000. You can claim the election
Deferring income to next year. If ness structure is a flow-through entity, only to offset net income, not to reduce
your business uses the cash method of you may face higher rates even if your it below zero to create a net operating
accounting, you can defer billing for your tax bracket remains the same. loss. (See “NOLs” on page 10.)
products or services. Or, if you use the
accrual method, you can delay shipping If your asset purchases for the year will
Depreciation
products or delivering services. But don’t exceed the phaseout threshold or your
For assets with a useful life of more than
let tax considerations get in the way of net income, consider 50% bonus depre-
one year, you generally must depreciate
making sound business decisions. ciation. (See “What’s new!” at right.) It
the cost over a period of years. In most
may provide greater tax savings because
Accelerating deductible expenses cases, the Modified Accelerated Cost
it has no asset purchase limit or net
into the current year. This also Recovery System (MACRS) will be prefer-
income requirement. But only Sec. 179
will defer tax. If you’re a cash-basis able to the straight-line method because
expensing can be applied to used assets.
taxpayer, you may make a state esti- you’ll get larger deductions in the early
Also consider state tax consequences.
mated tax payment before Dec. 31, years of an asset’s life.
so you can deduct it this year rather Warning: The expensing limit and phase-
But if you make more than 40% of the
than next. But consider the alternative out threshold have dropped significantly
year’s asset purchases in the last quarter,
minimum tax (AMT) consequences from their 2011 levels of $500,000
you could be subject to the typically
first. Both cash- and accrual-basis and $2 million, respectively. And for
less favorable midquarter convention.
taxpayers can charge expenses on a 2013, these amounts are scheduled to
Careful planning can help you maximize
credit card and deduct them in the drop again, to $25,000 and $200,000.
depreciation deductions in the year of
year charged, regardless of when the Also, the break allowing up to $250,000
purchase.
credit card bill is paid. of Sec. 179 expensing for qualified
Other depreciation-related breaks and leasehold-improvement, restaurant and
Warning: Think twice about these retail-improvement property has expired.
strategies also are available:
strategies if you’re experiencing a low- Congress may extend the enhanced
income year. Their negative impact on Section 179 expensing election. This
Sec. 179 breaks, however, so check with
your cash flow may not be worth the election allows you to deduct (rather than
your tax advisor for the latest information.
potential tax benefit. depreciate over a number of years) the

11. BUSINESS 9
Accelerated depreciation. The break rules for the first year is limited under is also limited to 50% of W-2 wages
allowing a shortened recovery period the luxury auto rules. paid by the taxpayer that are allocable to
of 15 years — rather than 39 years — domestic production gross receipts.
In addition, if a vehicle is used for busi-
for qualified leasehold-improvement,
ness and personal purposes, the associ- The deduction is available to traditional
restaurant and retail-improvement
ated expenses, including depreciation, manufacturers and to businesses engaged
property has expired, though it may be
must be allocated between deductible in activities such as construction, engi-
extended. Check with your tax advisor
business use and nondeductible personal neering, architecture, computer software
for the latest information.
use. The depreciation limit is reduced if production and agricultural processing.
Cost segregation study. If you’ve the business use is less than 100%. If It isn’t allowed in determining net self-
recently purchased or built a building or business use is 50% or less, you can’t use employment earnings and generally can’t
are remodeling existing space, consider Sec. 179 expensing, bonus depreciation reduce net income below zero. But it can
a cost segregation study. It identifies or the accelerated regular MACRS; you be used against the AMT.
property components and related costs must use the straight-line method.
that can be depreciated much faster, Employee benefits
perhaps dramatically increasing your cur- Manufacturers’ deduction Offering a variety of benefits can help
rent deductions. Typical assets that qualify The manufacturers’ deduction, also called you not only attract and retain the best
include decorative fixtures, security equip- the “Section 199” or “domestic produc- employees, but also save tax:
ment, parking lots and landscaping. tion activities deduction,” is 9% of the
Qualified deferred compensation
lesser of qualified production activities
The benefit of a cost segregation study plans. These include pension, profit-
income or taxable income. The deduction
may be limited in certain circumstances — sharing, SEP and 401(k) plans, as well
for example, if the business is subject
to the AMT or is located in a state that
Take advantage of bonus
doesn’t follow federal depreciation rules. WHAT’S NEW!
depreciation while it’s still available
Vehicle-related deductions Who’s affected: Businesses that have made or are considering asset purchases.
Business-related vehicle expenses can Key changes: The additional first-year depreciation allowance is 50% for 2012,
be deducted using the mileage-rate down significantly from the 2011 percentage. (See the chart below.) Qualified assets
method (55.5 cents per mile driven in include new tangible property with a recovery period of 20 years or less (such as
2012) or the actual-cost method (total office furniture, equipment and company-owned vehicles), off-the-shelf computer
out-of-pocket expenses for fuel, insur- software, water utility property and qualified leasehold-improvement property.
ance and repairs, plus depreciation).
Corporations can accelerate certain credits in lieu of claiming bonus depreciation
Purchases of new or used vehicles may for qualified assets acquired and placed in service through Dec. 31, 2012. (For
be eligible for Sec. 179 expensing, and certain long-lived and transportation property, the deadline is Dec. 31, 2013.)
purchases of new vehicles may be eligible
for bonus depreciation. (See “What’s Planning tips: If you’re eligible for full Section 179 expensing (see page 8), it may
new!” at right.) However, many rules provide a greater benefit this year because it can allow you to deduct 100% of an
and limits apply. asset acquisition’s cost. Plus, only Sec. 179 expensing is available for used property.
However, bonus depreciation may benefit more taxpayers than Sec. 179 expens-
For example, the normal Sec. 179 ing, because it isn’t subject to any asset purchase limit or net income requirement.
expensing limit generally applies to If you’re anticipating major purchases of assets in the next year or two that would
vehicles weighing more than 14,000 qualify, you may want to time them so you can benefit from bonus depreciation
pounds, but the limit is only $25,000 for while it’s available.
SUVs weighing more than 6,000 pounds
but no more than 14,000 pounds. Qualified assets acquired
and placed in service Bonus depreciation
Vehicles weighing 6,000 pounds or less
don’t satisfy the SUV definition and thus Jan. 1, 2008, through Sept. 8, 2010 50%
are subject to the passenger automobile
Sept. 9, 2010, through Dec. 31, 2011 100%
limits. For autos placed in service in
2012, the depreciation limit is $3,160. Jan. 1, 2012, through Dec. 31, 2012 50%
The limit is increased by $8,000 for vehi-
After Dec. 31, 2012 none
cles eligible for bonus depreciation. The
amount that may be deducted under Note: Later deadlines apply to certain long-lived and transportation property. Also, an
extension of 100% bonus depreciation has been proposed; check with your tax advisor
the combination of MACRS deprecia-
for the latest information.
tion, Sec. 179 and bonus depreciation

12. 10 BUSINESS
as SIMPLEs. You take a tax deduction Remember: A hike in individual income tax may be eligible for a $500 credit per
for your contributions to employees’ rates is scheduled for 2013. (See Chart 1 year for three years. The credit is limited
accounts, and the plans offer tax-deferred on page 2.) So if your business structure to 50% of qualified startup costs.
savings benefits for employees. (For is a flow-through entity (see Chart 4), you
Research credit. This credit (also
more on the benefits to employees, see may face higher rates in future years.
commonly referred to as the “research
page 12.) Certain small employers may
and development” or “research and
also be eligible for a credit when setting Tax credits
experimentation” credit) has expired,
up a plan. (See “Tax credits” at right.) Tax credits reduce tax liability dollar-for-
but there’s been much discussion about
dollar, making them particularly valuable.
HSAs and FSAs. If you provide employ- extending it and even making it perma-
Numerous types of credits are available
ees with qualified high-deductible health nent. The credit generally is equal to a
to businesses, but many expired after
insurance, you can also offer them Health portion of qualified research expenses.
2011 and, as of this writing, haven’t yet
Savings Accounts. Regardless of the type
been extended. (Check with your tax Energy-related credits. Because of
of health insurance you provide, you
advisor for the latest information.) Here either 2011 expiration dates or restric-
can offer Flexible Spending Accounts for
are a few credits to consider: tions based on units sold, these credits
health care. (See “Saving for health care”
generally won’t be available for 2012
on page 3.) If you have employees who Health care coverage credit for small
unless extended again.
incur day care expenses, consider offering businesses. For tax years 2010 to 2013,
FSAs for child and dependent care. (See the maximum credit is 35% of group Other credits. Examples of other
“Child care expenses” on page 4.) health coverage premiums paid by the credits that have expired but that may
employer, provided it contributes at be extended are the empowerment
Fringe benefits. Some fringe benefits —
least 50% of the total premium or of a zone tax credit and certain disaster relief
such as employee discounts, group term-
benchmark premium. The full credit is credits for the Gulf Opportunity Zone.
life insurance (up to $50,000 annually per
available for employers with 10 or fewer
person), health insurance, parking (up to
full-time equivalent employees (FTEs) Business structure
$240 per month) and mass transit / van
and average annual wages of less than Income taxation and owner liability are the
pooling (up to $125 per month) — aren’t
$25,000 per employee. Partial credits are main factors that differentiate one busi-
included in employee income. Yet the
available on a sliding scale to businesses ness structure from another. (See Chart 4
employer can still receive a deduction and
with fewer than 25 FTEs and average to compare the tax treatments.) Many
typically avoids payroll tax as well. Certain
annual wages of less than $50,000. businesses choose entities that combine
small businesses providing health care
flow-through taxation with limited liability,
coverage may be eligible for a tax credit. Retirement plan credit. Small employ-
namely limited liability companies (LLCs)
(See “Tax credits” at right.) ers (generally those with 100 or fewer
and S corporations. Sometimes it makes
employees) that create a retirement plan
NQDC. Nonqualified deferred compen-
sation plans generally aren’t subject to
nondiscrimination rules, so they can be Work Opportunity credit extended
WHAT’S NEW!
and expanded for veterans
used to provide substantial benefits to
key employees. But the employer gener- Who’s affected: Businesses hiring veterans.
ally doesn’t get a deduction for NQDC
plan contributions until the employee Key changes: The Work Opportunity credit generally benefits businesses hiring
recognizes the income. employees from certain disadvantaged groups, such as ex-felons, food stamp
recipients and disabled veterans. As of this writing, the credit has expired for most
NOLs groups. However, the VOW to Hire Heroes Act of 2011 extended the credit through
2012 for employers that hire qualified veterans. It also expanded the credit by:
A net operating loss occurs when operat-
ing expenses and other deductions for the n
Doubling the maximum credit — to $9,600 — for disabled veterans who’ve
year exceed revenues. Generally, an NOL been unemployed for six months or more in the preceding year,
may be carried back two years to generate n
Adding a credit of up to $5,600 for hiring nondisabled veterans who’ve
a refund. Any loss not absorbed is carried
been unemployed for six months or more in the preceding year, and
forward up to 20 years to offset income.
n
Adding a credit of up to $2,400 for hiring nondisabled veterans who’ve
Carrying back an NOL may provide a been unemployed for four weeks or more, but less than six months, in the
needed influx of cash. But you can elect preceding year.
to forgo the carryback if carrying the
Planning tips: If you need to add to your staff, consider hiring veterans. To be
entire loss forward may be more benefi-
eligible for the credit, you must take certain actions before and shortly after you hire
cial, such as if you expect your income to
a qualified veteran. Your tax advisor can help you determine what you need to do.
increase substantially or tax rates to go up.

13. BUSINESS 11
Installment sale. A taxable sale may
CHART 4 Tax differences based on business structure be structured as an installment sale,
due to the buyer’s lack of sufficient
Flow-through entity cash or the seller’s desire to spread the
or sole proprietorship C corporation gain over a number of years — or when
One level of taxation: The business’s Two levels of taxation: The business is the buyer pays a contingent amount
income flows through to the owner(s). taxed on income, and then shareholders based on the business’s performance.
are taxed on any dividends they receive. But an installment sale can backfire on
the seller. For example:
Losses flow through to the owner(s). Losses remain at the corporate level.
n
Depreciation recapture must be
For 2012, the top individual tax For 2012, the top corporate tax rate
reported as gain in the year of
rate is 35%. is generally 35%1, and dividends are
sale, no matter how much cash
generally taxed at 15%.
the seller receives.
1
See Chart 8 on page 16 for exceptions. n
If tax rates increase, the overall
tax could wind up being more.
sense to change business structures, but Sale or acquisition (Remember, the favorable 15%
there may be unwelcome tax conse- Whether you’re selling your business rate on long-term capital gains is
quences. Your tax advisor can help you as part of an exit strategy or acquiring scheduled to end after Dec. 31,
determine whether a change would another company to help grow your 2012. See Chart 3 on page 7.)
make sense for your company. business, the tax consequences can Of course, tax consequences are only
Some tax differences between structures have a major impact on the transaction’s one of many important considerations
may provide tax planning opportunities, success or failure. Here are a few key tax when planning a sale or acquisition.
such as differences related to salary vs. considerations:
distributions/dividends: Asset vs. stock sale. With a corpora- The self-employed
tion, sellers typically prefer a stock sale If you’re self-employed, you can deduct
S corporations. To reduce their employ-
for the capital gains treatment and to 100% of health insurance costs for
ment taxes, shareholder-employees may
avoid double taxation. (For more on yourself, your spouse and your depen-
want to keep their salaries relatively
capital gains tax, see page 6.) Buyers dents. This above-the-line deduction
low and increase their distributions
generally want an asset sale to maximize is limited to your net self-employment
of company income (which generally
future depreciation write-offs. income. You also can take an above-the-
isn’t taxed at the corporate level). But
line deduction for contributions made to
to avoid potential back taxes and penal- Tax-deferred transfer vs. taxable
a retirement plan and, if you’re eligible,
ties, shareholder-employees must take sale. A transfer of corporation owner-
an HSA for yourself.
a “reasonable” salary. What’s consid- ship can be tax-deferred if made solely
ered “reasonable” is determined by the in exchange for stock or securities of You pay both the employee and employer
specific facts and circumstances, but it’s the recipient corporation in a qualifying portions of employment taxes on your
generally what the company would pay reorganization. But the transaction must self-employment income. Generally, half of
an outsider to perform the same services. comply with strict rules. the tax paid is deductible above the line.
C corporations. Shareholder-employees Although it’s generally better to post- However, the 2011 reduction of the
may prefer to take more income as pone tax, there are some advantages to employee portion of the Social Security tax
salary (which is deductible at the a taxable sale: from 6.2% to 4.2% has been extended
corporate level though it will be subject to 2012, and thus the Social Security tax
n
The parties don’t have to meet
to employment taxes) as opposed to on self-employment income is reduced
dividends (which aren’t deductible at the technical requirements of a
from 12.4% to 10.4%. This doesn’t
the corporate level and are taxed at tax-deferred transfer.
reduce your deduction for the employer’s
the shareholder level but not subject to n
The seller doesn’t have to worry share of these taxes — you can still deduct
employment taxes) because the overall about the quality of buyer stock the full 6.2% employer portion of Social
tax paid by both the corporation and or other business risks of a tax- Security tax, along with one-half of the
the shareholder-employee may be less. deferred transfer. Medicare tax, for a full 7.65% deduction.
n
The buyer enjoys a stepped-up
Warning: The IRS is cracking down And you may be able to deduct home
on misclassification of corporate pay- basis in its acquisition’s assets and
office expenses against your self-
ments to shareholder-employees, so doesn’t have to deal with the seller
employment income. (See “Home
tread carefully. as a continuing equity owner.
office deduction” on page 3.) w

14. RETIREMENT
The ins and outs of tax-advantaged retirement plans
For many, building and preserving a substantial nest egg for retirement is
among their most important financial goals. Fortunately, there are many
tax-advantaged retirement plans available that can help you do just that.
By contributing as much as possible, you can help ensure a financially
secure retirement. But these plans also come with some potential pitfalls
that you can fall into if you’re not careful. So it’s important to understand
the ins and outs of the plans you use.
401(k)s and other If your employer offers a match, at mini- though your deduction may be limited if
employer plans mum contribute the amount necessary your spouse participates in an employer-
Contributing to a traditional employer- to get the maximum match so you don’t sponsored plan. You can make 2012
sponsored defined contribution plan miss out on that “free” money. (If your contributions as late as April 15, 2013.
is usually the first step in retirement employer provides a SIMPLE, it’s required (See Chart 5 for contribution limits.)
planning: to make contributions — though not
necessarily annually.) Roth options
n
Contributions are typically pretax,
A potential downside of tax-deferred
reducing your taxable income. More tax-deferred options saving is that you’ll have to pay taxes
n
Plan assets can grow tax-deferred — In certain situations, other tax-deferred when you make withdrawals at retire-
meaning you pay no income tax until savings options may be available: ment. Roth plans, however, allow
you take distributions. tax-free distributions; the tradeoff is
You’re a business owner or self-
n
Your employer may match some or that contributions to these plans don’t
employed. You may be able to set up
all of your contributions pretax. reduce your current-year taxable income:
a plan that allows you to make much
Chart 5 shows the 2012 employee con- larger contributions. You might not have 1. Roth IRAs. An added benefit is that
tribution limits. Because of tax-deferred to make 2012 contributions, or even set Roth IRAs can provide estate planning
compounding, increasing your contribu- up the plan, before year end. advantages: Unlike other retirement plans,
tions sooner rather than later can have a Roth IRAs don’t require you to take distri-
Your employer doesn’t offer a retire-
significant impact on the size of your nest butions during your lifetime. So you can
ment plan. Consider a traditional IRA.
egg at retirement. (See Case Study I.) let the entire balance grow tax-free over
You can likely deduct your contributions,
your lifetime for the benefit of your heirs.
But Roth IRAs are subject to the same low
CHART 5 Retirement plan contribution limits for 2012
annual contribution limit as traditional
IRAs (see Chart 5), and your Roth IRA
Limit for taxpayers Limit for taxpayers
under age 50 age 50 and older limit is reduced by any traditional IRA
contributions you make for the year. An
Traditional and Roth IRAs $ 5,000 $ 6,000 income-based phaseout may also reduce
401(k)s, 403(b)s, or eliminate your ability to contribute.
$ 17,000 $ 22,500
457s and SARSEPs1 2. Roth conversions. If you have a tra-
SIMPLEs $ 11,500 $ 14,000 ditional IRA, consider whether you might
benefit from converting all or a portion of
1
Includes Roth versions where applicable. it to a Roth IRA. A conversion can allow
Note: Other factors may further limit your maximum contribution.
you to turn tax-deferred future growth

15. RETIREMENT 13
into tax-free growth and take advantage 4. Roth 401(k), Roth 403(b), and be better off withdrawing from that.
of a Roth IRA’s estate planning benefits. Roth 457 plans. If the plan allows it, You can withdraw up to your contribu-
you may designate some or all of your tion amount free of tax and penalty.
There’s no longer an income-based limit
contributions as Roth contributions. Another option, if your employer-
on who can convert to a Roth IRA. But the
(Any employer match will be made to sponsored plan allows it, is to take a
converted amount is taxable in the year
a traditional plan.) No income-based plan loan. You’ll have to pay it back
of the conversion. Whether a conversion
phaseout applies, so even high-income with interest and make regular principal
makes sense for you depends on factors
taxpayers can contribute. payments, but you won’t be subject to
such as your age, whether you can afford
current taxes or penalties.
to pay the tax on the conversion, your tax
Early withdrawals
bracket now and expected tax bracket in Early distribution rules are also important
If you’re facing financial challenges, it may
retirement, and whether you’ll need the to be aware of if you change jobs or
be tempting to make withdrawals from
IRA funds in retirement. retire and receive a lump-sum distribution
your retirement plans. But generally this
from your employer’s retirement plan. To
3. “Back door” Roth IRAs. If the should be a last resort. With a few excep-
avoid the early-withdrawal penalty and
income-based phaseout prevents you tions, distributions made before age 59½
other negative income tax consequences,
from making Roth IRA contributions and are subject to a 10% penalty on top of
request a direct rollover from your old
you don’t have a traditional IRA, con- any income tax that ordinarily would be
plan to your new plan or IRA.
sider setting up a traditional account and due on a withdrawal. This means that you
making a nondeductible contribution to can lose a substantial amount to taxes Otherwise, you’ll need to make an indirect
it. You can then wait until the transac- and penalties. Additionally, you’ll lose the rollover within 60 days to avoid tax and
tion clears and convert the traditional potential tax-deferred future growth on potential penalties. Warning: The check
account to a Roth account. The only the amount you’ve withdrawn. you receive from your old plan may be net
tax due will be on any growth in the of 20% federal income tax withholding.
If you must make an early withdrawal
account between the time you made the If you don’t roll over the gross amount
and you have a Roth account, you may
contribution and the date of conversion. (making up for the withheld amount with
other funds), you’ll be subject to income
tax — and potentially the 10% penalty —
CASE STUDY I
on the difference.
Contributing a little more now can
result in a substantially larger nest egg Required minimum distributions
After you reach age 70½, you must take
When Elizabeth is age 42, she starts a new job and decides to contribute $10,000 annual required minimum distributions
of her salary annually to her employer’s traditional 401(k) plan. After 10 years, (RMDs) from your IRAs (except Roth IRAs)
she increases her contributions to $15,000 per year. and, generally, from your defined con-
Victoria is also 42, and she starts contributing to her employer’s traditional 401(k) tribution plans. If you don’t comply, you
plan on the same day. But she decides to immediately defer $15,000 of her salary can owe a penalty equal to 50% of the
annually. Remember, the contributions are before tax. So if Victoria is in the 28% amount you should have withdrawn but
tax bracket, her extra $5,000 per year contribution is costing her only $3,600 — or didn’t. You can avoid the RMD rule for
$300 per month. (And that doesn’t even take into account any state tax savings.) a Roth 401(k), Roth 403(b) or Roth 457
plan by rolling the funds into a Roth IRA.
Elizabeth and Victoria both enjoy a 6% rate of return and maintain their annual con-
tributions for 25 years, until they retire at age 67. At retirement, Victoria’s plan has So, should you take distributions between
$157,942 more than Elizabeth’s, even though she contributed only $50,000 more. ages 59½ and 70½, or take more than
the RMD after age 70½? Distributions
As you can see, making additional contributions now that cost you only a few
in any year your tax bracket is low may
hundred dollars more per month can result in a substantially larger nest egg at
be beneficial. But also consider the lost
retirement than if you wait to increase your contributions.
future tax-deferred growth and, if appli-
Total contributions made cable, whether the distribution could:
1) cause your Social Security payments to
Elizabeth: $325,000
become taxable, 2) increase income-based
Victoria: $375,000 Medicare premiums and prescription drug
Balance at age 67 charges, or 3) affect other deductions or
Elizabeth: $665,026 credits with income-based limits.
Victoria: $822,968 If you’ve inherited a retirement plan,
Note: This example doesn’t consider employer matching. It’s for illustrative purposes only consult your tax advisor regarding the
and isn’t a guarantee of future results. applicable distribution rules. w

16. ESTATE PLANNING
Why estate planning continues to be a challenge
Estate planning is never easy. You must address your own mortality
while determining the best strategies to ensure that your assets will be
distributed according to your wishes and that your loved ones will be
provided for after you’re gone. You also must consider how loved ones
will react to your estate planning decisions, which may be difficult if,
for example, a family business is involved or you wish to provide more
to certain family members. But estate planning may be especially
challenging this year because of uncertainty about whether favorable
exemptions and rates will be allowed to expire in 2013 as scheduled.
Estate tax or 2012, unless Congress extends it. You can exclude certain gifts of up
The current estate tax exemption is at Also, exemption portability doesn’t pro- to $13,000 per recipient each year
an all-time high, and the top estate tect future growth on assets from estate ($26,000 per recipient if your spouse
tax rate remains low. But the favorable tax as effectively as applying the exemp- elects to split the gift with you or you’re
exemption and rate will be in effect only tion to a credit shelter trust does. giving community property) without
through 2012 unless Congress extends using up any of your gift tax exemption.
So married couples should still consider
them. (See Chart 6.) making asset transfers and setting up
GST tax
Also set to expire is exemption “portabil- trusts to ensure they take full advantage
The generation-skipping transfer tax gen-
ity” between spouses: If part (or all) of one of both spouses’ exemptions. Transfers to
erally applies to transfers (both during life
spouse’s estate tax exemption is unused your spouse — during life or at death —
and at death) made to people more than
at death, the estate can elect to permit are tax-free under the marital deduction
one generation below you, such as your
the surviving spouse to use the deceased (assuming he or she is a U.S. citizen).
grandchildren. This is in addition to any
spouse’s remaining estate tax exemption.
Gift tax gift or estate tax due. The GST tax also
Making this election is simple and provides
follows the estate tax exemption and top
flexibility if proper planning hasn’t been The gift tax follows the estate tax exemp-
rate for 2012. (See Chart 6.)
done before the first spouse’s death. tion and top rate for 2012. (See Chart 6.)
Any gift tax exemption used during life Warning: Exemption portability
But the election is available only to the
reduces the estate tax exemption available between spouses doesn’t apply to the
estates of spouses who’ve died in 2011
at death. GST tax exemption.
CHART 6 Transfer tax exemptions and highest rates
Highest estate and gift
Year Estate tax exemption1 Gift tax exemption GST tax exemption tax rates and GST tax rate
2011 $ 5 million $ 5 million $ 5 million 35%
2012 $ 5.12 million $ 5.12 million $ 5.12 million 35%
20132 $ 1 million $ 1 million $ 1 million 3 55%
4
1 Less any gift tax exemption already used during life.
2 Assuming legislation isn’t signed into law extending current levels or making other changes. Contact your tax advisor for the latest information.
3 Indexed for inflation.
4 The benefits of the graduated gift and estate tax rates and exemptions are phased out for gifts and estates over $10 million.