Days Dwindling Down for 2012 Tax and Estate Planning
The Bush Era Tax Cuts are scheduled to expire at the same time that the Obama Care Medicare and Investment taxes are scheduled to begin. Since we have no crystal ball predict whether Congress will extend the Bush Era Tax Cuts we have to assume that if they expire, taxes on income, capital gains, dividends, estates and gifts will all increase in 2013.
KEY POINT: High income earners will be hardest hit by the double whammy of the new taxes imposed by the Affordable Care Act and the expiration of the Bush Tax Cuts. Daszkal Bolton is urging our clients to plan now to take advantage of the current rules.
Depending on your personal tax situation, the scheduled new taxes and tax rate increases for 2013 may call for accelerating income this year or deferring tax deductions until next year. You may want to consider the following planning opportunities that either accelerate income into 2012 or defer deductions into 2013:
Accelerate business income and/or stock option income into 2012
Defer deductible business expenses to 2013
Delay itemized deductions such as charitable contributions, property tax payments and state income tax payments until 2013
Elect out of installment sale treatment for 2011 and 2012 sales (where available) and recognize the entire amount of gain in the year of sale (instead of deferring it over thepayment period). Alternatively, you may consider negotiating an accelerated payment of a previously existing installment sale as a means of gain realization prior to 2013.
Shareholders of closely held businesses may want to consider declaring dividends in 2012 while dividend rates are low and before the Investment Tax applies
Consider a Roth IRA conversion in 2012
Capital Gains Planning
Capital gain tax rates are scheduled to increase in 2013 as well as be subject to the new Investment Tax. Therefore, you may want to consider accelerating capital gains in 2012 on those investments that you are planning to sell in the next few years to take advantage of these tax changes. On the other hand, you may be better suited to defer the recognition of capital losses to future years when they may have a greater tax benefit. Finally, beyond 2012, you should consider deferring capital gains.
If you are charitably inclined, you may consider donating appreciated securities, rather than cash, to charity in order to receive a charitable deduction equal to the fair market value of the donated securities and avoid paying capital gains on the appreciation. Having preserved the cash, consider purchasing new investments with a new higher basis with the cash you would have donated, potentially lowering the exposure to the higher tax rate and the Investment Tax beginning in 2013.
Estate and Gift Tax Planning
Individuals can transfer up to $13,000 ($26,000 for married couples) per recipient per year without any gift tax consequences. Gifts in excess of that amount are sheltered from gift tax by an individual’s lifetime gift exemption. Currently, the federal estate, gift and generation-skipping transfer (“GST”) tax exemption for each individual is $5,120,000 ($10,240,000 exemption for married couples). On January 1, 2013, the estate and gift tax exemptions are scheduled to revert to $1,000,000, and the GST exemption is scheduled to be approximately $1,400,000. As well, the current top gift, estate and GST tax rate is scheduled to increase from 35% to 55% on January 1, 2013.
In light of the scheduled increases in the federal estate, gift and GST tax exemptions and rates, you may want to consider the following planning opportunities before the end of the year to provide significant tax savings later:
Make gifts of your remaining gift tax exemption this year
Make gifts to grandchildren and/or trusts for multiple generations (including children and subsequent generations) this year in order to use any remaining GST tax exemption
Interest rates are historically low right now. Two ways to take advantage of these low rates are Grantor Retained Annuity Trusts (“GRATs”) and intra-family loans. You may want to consider creating separate GRATs for investments in different asset classes or creating new intra-family loans. For example, in order for a loan from a parent to a child to be respected by the IRS for tax purposes, the interest rate must be equal to or exceed the monthly IRS published rates for loans with similar terms. In October 2012, the annual interest rate that must be charged for a 9 year term loan is only 0.93%.
Consider this – the federal government is essentially a “silent partner” in your estate. For assets you leave in your taxable estate, your “silent partner” may enjoy up to 55% of the value. Any assets that you remove from your estate now, taking full advantage of the current $5,120,000 exclusion, allows you to stop sharing future appreciation with the IRS.
CONTACT US: What should you do now? Find all your existing documents – wills, trusts, life insurance policies, prior gift tax returns – and RUN, don’t walk, to one of our three offices so we can start the process of tax and estate planning. Timothy Devlin, CPA, Partner, will work with you to be sure you take full advantage of the current tax laws. Tim may be reached at 561-367-1040 or [email protected]