EDUCATION CENTER
Tax Planning & Tax Law Change

Note for year-end 2011: In addition to Chapter 9, click here to read some of our articles on year-end tax planning, displayed in our older education center.

There are some annual tax extenders that Congress is still discussing for year-end 2011. Congress already passed the annual AMT inflation patch for 2011, but they have not done that patch yet for 2012. For these reasons, we didn't do a major update to our year-end tax planning content this year end 2011. Our same content applies from year-end 2010 to 2011.

We covered year-end tax planning during our Webinar on
Dec. 7, 2011
Trader Tax Law Update: Business Treatment, Elections, Entities,
Retirement Plans, Year-End Tax Planning & Current Developments.
Click here for YouTube recording. Scroll to 0:10:00 for that part.

Excerpt from Green's 2012 Trader Tax Guide:

Most year-end tax planning articles in the mainstream media focus on tried-and-true strategies — what I call “plain vanilla” strategies. Active traders should also focus on tax-planning opportunities unique to their industry, especially those rising to the level of trader tax status.

BUSH-ERA TAX CUTS
If the Bush-era tax cuts expire at year-end 2012 on your marginal tax bracket, and your tax rates rise in 2013, you may want to accelerate income and defer expenses — the reverse of what taxpayers normally do — to benefit from lower (relatively speaking) tax rates. The difference may be significant.

IS “TAX REFORM” A FACTOR IN PLANNING THIS YEAR?
I don’t think tax reform will be negotiated until 2013 at the earliest. It might come up earlier as part of another debt-ceiling crisis negotiation as recent reports indicate the debt ceiling may be hit around the November elections. But I expect tax reform to arise with the next Congress and President in 2013. Debt reform and tax reform — two related issues — are way too important to leave to a lame-duck Congress.

As you factor in all the potential future outcomes, it’s going to be a gamble one way or the other this year. Wait as long as you can for visibility on the tax front. The November elections should provide some clarity. Check our site for updates.

AVOID OR EMBRACE AMT
Congress patched the alternative minimum tax for 2011 but has not yet patched it for 2012. Each year, the AMT patch saves millions of taxpayers from “bracket creep” (which means AMT rates aren’t indexed for inflation, unlike regular tax rates). The patch raises the AMT exemption level.

Unless Congress passes its annual patch, AMT sky rockets and explodes on many unsuspecting middle income and upper-middle income taxpayers. Don’t expect too much discussion about this as it upsets voters before the election. AMT was intended for the super rich who rarely pay it anymore.

WASH SALES ARE USUALLY A PAIN
A wash sale occurs when you trade securities at a loss, and within 30 days before or after, you trade substantially identical securities (which include options on that security).

Sometimes wash sales can be a good thing. A Section 475 MTM election exempts you from wash-sale reporting on your business trading accounts. If you elect Section 475 MTM in 2012, 2011 carryover wash sales on trading business positions only become part of your 2012 Section 481a ordinary-loss adjustment, which converts wash sales into ordinary losses as of Jan. 1, 2012. The 2012 Section 481a adjustment is the 2011 year-end unrealized gain or loss. In this example, wash sales are better than capital loss carryovers, as the latter can never be converted into ordinary loss treatment.

TAX-LOSS SELLING
“Tax-loss selling” is a major factor in the markets each year and is recommended as a simple year-end tax strategy for investors. If an investor is holding a security with an unrealized capital loss, he might want to sell that security before year-end to reduce taxes due on capital gains.

Tax-loss selling might not be a factor for taxpayers who exceeded their $3,000 capital-loss limitations earlier in the year. Also, futures traders with Section 1256 MTM and securities business traders with Section 475 MTM accounting don’t need year-end tax-loss selling to take losses. MTM accounting imputes their losses and gains at year-end.

ENTITIES AND AGI DEDUCTIONS
If you have a trading entity for 2011 and plan to use it for 2011 retirement-plan and/or health-insurance premium AGI-deduction strategies, you should have taken certain vital actions before year-end 2011. All earned income fees and officer salaries had to be paid before year-end.

Our entity clients should consult with their assigned CPA about how much their retirement plan contribution should be to maximize tax savings.

TRADER TAX STATUS
Try to bunch business deductions into the year you qualify for trader tax status.

BOTTOM LINE
Consider the big picture on taxes affecting traders and don’t forget to prepare a pro-forma year-end tax return using current tax software to deal with your tax matters for 2012. Try to find a way around AMT if triggered. Assess your trader tax status and capital gains and losses year-to-date along with all unrealized gains and losses on open positions. Develop the right strategy to reduce or increase capital gains and maximize the $3,000 capital-loss limitation — but don’t exceed that amount if possible. Carefully plan your Section 475, NOL carry back/forward, or Roth conversion strategies. If you missed out on any of these tax strategies for the 2011 tax year, start planning now for 2012.

This is an excerpt from Green’s 2012 Trader Tax Guide • Copyright © 2012