Financial Planning > Tax Planning > Tax Reform

Don’t let clients be blinded by the 2013 sunset: Tax planning now

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Momentous tax changes may be lurking in 2013. It may not matter who is elected president this November, liberal, conservative, or middle-of-the-road. It’s really who controls Congress that’s important, and if they can, or will, work with the president. And, unless Congress acts, the Bush-era tax rate breaks — those enacted in 2001 and 2003 (EGTRRA and JGTRRA) and extended by Congress — will come to an end (or sunset) on Jan. 1 of 2013.

See also: LIMRA: More than 1 in 8 U.S. households may owe estate tax in 2013

The most likely scenarios are that tax breaks may be terminated, deferred entirely or deferred for all taxpayers other than those with higher incomes. Or perhaps something else, depending on our lawmakers. Congress might just defer the sunsets, with a few changes and modifications, and extend expiring tax provisions.  

Besides tax rate breaks, there are many other tax areas that will be affected. Let’s look at a few.

Capital Gains and Dividend Taxes Most long-term capital gains are taxed at a 15% rate (with some taxed at 0%), with qualified dividend income taxed at the same rates. Under the sunset, most long-term capital gains will be taxed at a maximum rate of 20% (18% for certain assets held more than five years). And dividends for individuals will be taxed at ordinary income rates.

Estate and Gift Taxes For 2011 and 2012 the estate and gift tax rates are the same or “unified.” Come 2013, if Congress doesn’t act, the rules that would have been in effect back in 2001 will apply. Some of them: the applicable exclusion amount will be $1 million (now $5.12 million), and the maximum estate and gift tax will be 55% (now 35%).

Health Care Reform Tax Under the Patient Protection and Affordable Care Act (PPACA), after Dec. 31, 2012, a 3.8% tax applies to the lesser of: (1) net investment income, or (2) the excess of modified adjusted gross income (MAGI) over threshold amounts — $250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 for all others. [MAGI is adjusted gross income (AGI), increased by certain foreign income amounts, and “net investment income” has its own special definition applicable to this tax.]

It may be good advice to die now (if morbid), but if that’s not possible or desirable, taxpayers should consider planning to move income items into 2012, when rates may well be lower, and at least some certainty prevails.

For more on estate planning, see:

Maximize your client’s estate

Letter to an ex

GOP Backs Estate Tax Repeal, Shift to Defined Contribution Health Programs