Post Election Tax Planning

 In Planning, Taxation
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After the results of the 2012 Presidential Election we can say definitively that taxes will go up in 2013; it’s just a question of how much. It appears that President Obama will seek to the let the tax cuts enacted during the Bush Presidency expire at year-end for high income taxpayers. The definition of “high income taxpayer” will probably be married couples making more than $250,000 and single filers earning at least $200,000. That probably means that the top federal tax rate will be increased from the current 35 percent to 39.6 percent, the capital gains tax rate will be increased from the current 15 percent to as much as 23.8 percent and, as we mentioned last month, the exemptions from estate and gift taxes will be decreased substantially.

For the first time in many years we’ll be advising some of our clients to accelerate their earned and investment income in the current year to take advantage of the lower rates. Higher income taxpayers should be evaluating their portfolios, bonus structures, and estates right now.

In terms of planning for capital gains, the first thing that needs to be looked at is whether there are large carryover losses remaining from prior years. If this is the case, you might not want to rush to sell securities before year-end if you have enough losses to offset future gains. But, if you were planning to sell some securities or re-balance your portfolio in 2013, you might want to consider doing this before year end to take advantage of the 15% capital gains rate.

Owners of closely held businesses should strongly consider accelerating bonuses or dividends in 2012. Employees who have a choice to receive their bonus this year should do so and consider exercising stock options that are set to expire

As we explained in our blog last month,the current estate and gift exemptions of $5.12 million are scheduled to expire at the end of 2012 and President Obama wants to set the estate tax threshold at $3.5 million while dropping the gift-tax exemption to $1 million as it was in 2009. By making substantial gifts under the $5.12 million exemption, an individual can reduce the size of their estate and the potential tax hit at the time of their death. Because the end of the year is just around the corner, any plan to gift assets should be well under way.
Even though the election provided us with some level of clarity, we must be ready for the unexpected before the year ends. While the Democrats maintained control in the Senate, the Republicans kept their majority in the House of Representatives. This ensures that resistance to President Obama’s efforts to raise taxes on higher income Americans will continue. Another issue that has to be addressed by Washington is the “fiscal cliff” of tax increases and spending cuts that will automatically start in January if Congress doesn’t act. One thing is for sure, things will be fast and furious in the next 40 days or so.

Be sure to visit our blog next month as we will discuss in-depth tax planning ideas for the end of the year and up to date changes.

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