In today’s world where our Congress has demonstrated the inability to decide issues of importance, we are left with uncertainty when trying to determine what the tax law will be next year and beyond. The result is the need for “contingency” planning and making clients aware of potential issues and opportunities. Given the current state of the laws, some items to consider are as follows:
• Beginning in 2013, qualified dividends will be subject to ordinary income tax rates as they were prior to 2003 resulting in an increase in tax from 15% to potentially 39.6%. This could potentially impact public companies that are sitting with significant cash to declare a special dividend in 2012 so that their shareholders would be taxed at lower rates. In addition, any clients owning privately held “C” corps with excess earning and profits should consider making larger dividends in 2012.
• Beginning in 2013 long term capital gains will be taxed at higher rates. In 2012 such gains are taxed at either a zero rate or a 15% rate depending on ones marginal tax bracket, whereas in 2013 the rates will be 10% or 20%n or higher. In addition, in 2013 such gains could also be subject to the 3% healthcare surtax. Thus 2012 may be the year to realize gains that would otherwise be realized in 2013. If anyone is holding notes that are being taxed according to the “installment sale” rules it may be beneficial to accelerate unrecognized gains to 2012, keeping in mind the present value of the accelerated tax payment.
• 2012 may be a year where gain harvesting is more critical than loss harvesting given the higher 2013 tax rates.
• Starting in 2013 ordinary income tax rates will increase to their pre-2001 levels. The planning with this would be to consider accelerating income into 2012 based on tax planning with the client’s tax professionals and considering the economic benefits if any.
• Income shifting will be potentially more beneficial after 2013 when tax rates increase. For example shares of an S corporation can be gifted to children in lower tax brackets thereby shifting future income to lower rates. Planning with the kiddie tax and other issues require coordination of strategies with tax and estate tax professionals.
• 2012 Roth Conversions may be beneficial if tax rates increase going forward; again a careful cost benefit analysis needs to be done to be sure a conversion makes economic sense.
• Limitation of the tax benefits associated with itemized deductions are potentially being imposed in 2013 resulting in the tax benefits associated with charitable contributions and other expenses being limited.
• The President’s tax proposal has potential limits and reduction of tax benefits associated with qualified retirement plan benefits that could significantly impact solo plans and other high deduction plans that may require quick planning so as to be grandfathered under existing law if such provisions are enacted.
• Finally there is the whole estate tax law that is left in limbo resulting in the potential need for quick year end action if the current exemptions are decreased.
While many advisors assume this will be a repeat of 2010 and the tax issues will be “kicked down the road” again by Congress it is important that we stay in front of our clients and keep them aware of the issues as there is significant political pressure to address the income tax issues given the deficit.
These are complex issues that are best dealt with by a client’s tax professional’s so the long term benefit for us is to bring the client’s full team together and be a catalyst for change rather than the specialist.