2012 Year-End Tax Planning Considerations

Consider your future income, capital gain and payroll taxes:

The current tax environment is very uncertain. One thing is certain, if Congress does not take action before the end of the year, tax rates are scheduled to go up for 2013. The tax increases include the following:

• The maximum marginal tax rate on long term capital gains will increase from 15% to 20%
• Qualified dividends increase from 15% to ordinary income rates (high of 39.6%)
• Marginal tax rates increase for ordinary income and the low 10% bracket will be eliminated
• Payroll taxes increase from 4.2% to 6.2% on employees resulting in an additional 2% in tax

It is possible that Congress will act and these tax increases will be averted. However, even if Congress does act, it is likely that high net worth individuals will still experience a tax increase next year.

Consider your exposure to the 3.8% Medicare surcharge tax:

On January 1, 2013, certain provisions of The Health Care and Education Reconciliation Act of 2010 (the “Act”), including imposition of a new 3.8% Medicare surcharge tax, go into effect. The Medicare surcharge tax applies as follows:

• The net investment income for high income taxpayers includes a 3.8% Medicare surtax on the lesser of two amounts: (1) their net investment income, or (2) the excess of the taxpayer’s modified adjusted gross income over a threshold amount
• The threshold amount is $200,000 for single filers or $250,000 for joint filers and $11,650 for irrevocable trusts and estates with discretionary distribution provisions
• Investment income is defined to include taxable interest and dividends, long and short term capital gains, annuity income, passive rental income, royalties, and passive activity income

Accelerating investment income in 2012 may be advantageous for you. The 3.8% Medicare surcharge tax is imposed on passive activities but not on income derived from an active business. Together with your accountant and financial planners, you may want to assess whether to sell assets and recognize gain, accelerating income this year to avoid the imposition of the 3.8% Medicare surcharge tax next year. Individuals may want to assess whether they are active or passive and explore opportunities of becoming active in their trade or business.

Consider the future of estate and gift taxation:

For the remainder of 2012, the combined gift and estate tax exemption is at $5,120,000 per person. The exemption significantly expands one’s ability to make lifetime gifts without incurring a gift tax. Time is running short to take advantage of the certainty of current law:

• A married couple can gift a total of $10,240,000 free of any gift tax
• Many states impose an estate tax, but far fewer impose a gift tax
• Even at this late date, if you want to make lifetime gifts of amounts above $1,000,000 there is time to effectively and completely make gifts of your assets, removing them from your estate for estate tax purposes
• Each person can make annual tax-free gifts of $13,000 per person, per recipient, as well as unlimited direct gifts for educational and medical expenses

Currently, this historically large exemption is scheduled to expire on December 31, 2012, with a return to a $1,000,000 exemption and a 55% federal tax rate on gifts over that amount. There is much speculation whether Congress will adopt an exemption over $1,000,000, but the fact is that no one knows and everyone is guessing. Where your legacy is concerned, don’t be caught short relying on speculation.