RECENT ENGAGEMENTS

Corporate Year-End Tax Adjustments

Smith Dickson takes pride in our ability to provide proactive tax planning services, recognizing opportunities for significant tax savings for our clients.  In a recent engagement, Kirin Barnett, CPA, MSA, our Director of Taxation, met with a client that had converted from C-corporation to S-corporation status in 2011.  The client had approximately $2 million in prior year C-corporation retained earnings and had a very good year in 2012, putting lots of cash in the bank.

Working with the client and looking ahead to their 2013 needs and projected federal tax rate increases, we saw a tremendous opportunity to save on federal income taxes.  Unless Congress makes a change, the top income tax rate in 2013 on ordinary income will increase from 35% to 39.6%.  Further, the 3.8% Medicare tax on investment income that was passed as part of the Health Care Reform Bill becomes effective in 2013.  The top dividend rate will increase from 15% to 39.6% plus 3.8%.  For our client, this combined rate of 43.4% was measured against the current 2012 long term capital gains rate of 15%.  The client had $700,000 in excess cash this year, which was applied against retained earnings; this saved $198,800 in projected 2013 federal taxes (15% vs. 43.4%).

Capital Gains Harvesting

Long–term capital gains rates are scheduled to increase from 15% in 2012 to 20% in 2013.  As such, many taxpayers will benefit from “harvesting” gains in 2012. This strategy involves selling assets in 2012 to take advantage of the lower 2012 tax rates.

In a recent engagement, Kirin Barnett, CPA, MSA, Director of Taxation, advised our client to work with her investment broker to time the sale of stocks in her long-term position.  This was done in order to generate long-term capital gains in an effort to pay long-term capital gains taxes at the 2012 rate of 15%.  The client had approximately $1 million in long-term capital gains and chose to recognize those gains at 15% vs. 20%; therefore, she saved $50,000 in federal taxes by recognizing the income in 2012.  As a side note, since California income tax rates went up retroactively to 01/01/2012 (due to Prop. 30), the same state tax rate applies regardless  of whether the gain was recognized in either year.

If you are interested in an analysis of how your personal or corporate tax structure would benefit from our tax planning services, please contact Kirin Barnett, Director of Taxation.