Now that the IRS has opened up the floodgates for tax filing after delaying the start of tax season following the year-end scramble to pass American Taxpayer Relief Act of 2012, you’re probably starting to wonder just what in the world the tax bite will be for your investing activities.
Mark Kohler, CPA, attorney, and author of Lawyers are Liars: The Truth About Protecting Our Assets and What Your CPA Isn't Telling You sees several ways retail investors can reduce their tax bill. It turns out that you don’t have to be some mega-mogul with offshore corporations, yachts, and citizenship in Liechtenstein and Monaco to be able to ease some of the burden of taxes. He also has some surprising news for people who thought that they might have avoided a tax bullet with some of the most publicized thresholds of the new legislation.
Here are some of the areas that Kohler identified for all of us to look at as we plan for this tax season and beyond:
The 3.8 percent net investment income tax will hit people who don’t expect it. Section 1411 of the Internal Revenue Code (that’s IRS regulations for people who aren’t lawyers) states that if you have net investment income and modified adjusted gross income tax above the thresholds below, you will owe 3.8 percent of the lesser of your net investment income or the amount that your modified adjusted gross income exceeds the threshold.
The lack of use of a self-directed IRA. If you’re going to crowdfund a business, help out a family business, or invest as an angel, you may want to consider using a self-directed IRA, which lets you place non-traditional assets (private placements, investment real estate, etc.) in an IRA. According to Kohler, you can achieve this for under $1,500 and avoid prohibited transactions with the IRS. This is how Mitt Romney got so much money in his IRA; he used a self-directed IRA to invest in some of Bain’s projects.
New reporting requirements from the Emergency Economic Stabilization Act of 2008 have kicked in. While the actual text of the bill covers cost-basis reporting requirements for covered securities and a whole host of other sections which make for insomnia-curing reading material, the main impact is that 2012 tax returns now have to include adjusted cost basis information for underlying securities in mutual funds. Thus, if you’re an active trader of mutual funds, your 1099-B is going to be much thicker, and it will cost you more to have your accountant enter in all of the transactions, particularly if you’re using the average cost-basis for tax purposes.
Using tax software and not being strategic about taxes may be costing you money. If you have W-2 income and maybe a couple of small stock investments, it’s probably not going to be worthwhile to go to a certified public accountant to plan for taxes, but if you have a small side business, rental property, or are an active trader, then it’s worth evaluating whether or not using a CPA rather than tax software or going to a mass market retail tax preparation firm could save you taxes.
A lot of people think that tax changes in 2012 won’t affect them and that it’s not worth consulting with a CPA to see about opportunities to legally reduce and avoid taxes. That may be a penny wise and pound foolish strategy.
Jason Hull is a candidate for the CFP(R) Board's certification, is a Series 65 securities license holder, and owns Hull Financial Planning.