Between the pending expiration of the Bush-era tax cuts, the Affordable Care act, and the Medicare tax on investment income, experts agree that tax increases are inevitable, and it is best to start planning now. We asked our resident expert, Financial Advisor Tracie Southerland, what we should expect this upcoming tax season. Expiration of Bush Tax Cuts and Affordable Care Act If the federal level tax cuts are allowed to expire, changes can be summarized as follows:
- Ordinary income taxes will rise: five rates would be 15%, 28%, 31%, 36%, and 39.6%. Current rates are 10%, 15%, 25%, 28%, 33%, and 35%.
- Long-term capital gain rates will rise: 20%, increased from the current 15%.
- Dividends will be treated as ordinary income which is increased from the current preferential rate of 15% to the full ordinary income rates.
Resetting of the Estate Tax and Gift Taxes Under current law, the estate tax exemption is scheduled to drop from the current $5.1 million to $1 million in 2013, and the estate tax rate will jump from 35% to 55%. While legislation could be passed that would extend the current estate tax rates, most observers think that either nothing will be done, and the estate tax exemption will revert back to the $1 million level/55%, or that Congress could temporarily extend the current rules and not change anything.
Proposed California Tax Legislation A ballot initiative will appear on the November 2012 ballot. If passed, those making over $250,000 a year would see their state income tax rates increase by 1%, those making more than $300,000 would see an increase of 2%, and those making $1 million or more would now pay 3% more.
Strategies to Reduce or Defer Proposed Gift, Estate and Income Tax Increases
- Sell appreciated assets during 2012 to take advantage of current 15% long-term capital gain tax rates.
- Exercise and/or sell non-tax qualified stock options at today’s lower income tax rates.
- Convert traditional IRAs to Roth IRAs
- Accelerate income into 2012 and defer deductions into 2013.
- Accelerate gifting and asset transfers into 2012
For many of you, there may be no action to take, however we recommend that you speak with your tax professional prior to December 31st to see if accelerating income, gifting and asset transfers, or deferring deductions, may be appropriate for you.
Also, keep in mind that these tips are not a replacement for personal tax advice, and that you should consult with your own tax advisor about your specific situation, and the applicability of new and existing tax laws.