Foresight, fall 2012

Start Planning Now for "Taxmageddon"

It has been referred to as “Taxmageddon” and the “2013 tax cliff.” Whatever you want to call it, significant changes will occur to the federal tax code at the beginning of next year — at least as things stand right now.

Of course, the presidential and congressional elections are also just a little over a month away, and their outcome will likely have a big impact on what the tax situation actually looks like on January 1, 2013. In the meantime, forward-thinking business owners and high-net-worth individuals aren’t hesitating to make plans based on what we know now.

Expiration of Bush Tax Cuts

The big tax event that’s looming on the horizon is the expiration of the so-called Bush tax cuts. Unless Congress votes to extend them again, tax rates on ordinary income, capital gains, dividends and estates will all rise in January.

Specifically, the tax rates paid by individuals in the top two income brackets will jump to 39.6 percent and 36 percent (from the current 35 percent and 33 percent, respectively). In addition, income phase-outs for exemptions and deductions will also kick in at this time.

On the investment side, the top tax rate on capital gains is scheduled to rise from the current 15 percent to 23.8 percent, while the top rate on dividends will nearly triple — from 15 percent to 43.4 percent. These rates — which will apply to individuals with an adjusted gross income (AGI) of $200,000 or more and married couples with AGI of $250,000 or more — include a new 3.8 percent investment surtax that is part of the Affordable Care Act.

Meanwhile, the top estate, gift and generation skipping transfer (GST) tax rate will rise from the current 35 percent to 55 percent. And the estate tax exemption will drop from $5.12 million per person (or $10.24 million for a married couple) to just $1 million per person (or $2 million for a married couple). The estimated exemption amount for GST taxes in 2013 is approximately $1.4 million.

Planning Strategies

We will meet with our clients in the coming weeks to discuss the issues that are most relevant for your specific needs and circumstances. Here are a few planning ideas worth considering between now and New Year's Eve:

• Income shifting – A common year-end tax strategy is to defer income into the following year in order to delay the payment of tax for a year. But this year, the opposite strategy may be more appropriate in order to have both ordinary and investment income taxed at the current rates. In addition, accelerating itemized deductions into 2012 might make sense, given the phase-outs that are scheduled to take effect in 2013.

•  Business sales – If you’re considering selling a business, it might make sense to try to close the sale before the end of the year, if this is feasible. Installment sales of some closely held businesses may be subject to the 3.8 percent surtax on capital gains, so this could potentially save tens of thousands of dollars on the sale of a multi-million-dollar business.

•   Grantor Retained Annuity Trusts (GRATs) and dynasty trusts – These vehicles have traditionally been used by affluent individuals and families to shift wealth to their heirs (especially assets that will appreciate in value) and thus reduce their taxable estates. However, the benefits of using these tools may be significantly diminished starting in 2013. Barnes Dennig Tax Manager Scott Cress discussed the issue in greater detail earlier this year in an article for the Goering Center newsletter.

Don’t Forget About the AMT

The Alternative Minimum Tax (AMT) is one more factor to take into consideration as you plan your year-end tax moves. Certain strategies that seem to make tax-sense on the surface could ultimately lead to an AMT liability down the road that ends up costing significantly more in taxes.

The uncertainty and complexity of tax planning this year make it critical that you meet with your financial and tax advisors soon. You can contact a Barnes Dennig representative at 513.241.8313. Every individual’s situation is unique, and only you and your advisors can determine the appropriate course of action for you.

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