By Michael Lortz and Erin Dulley
Geffen Mesher & Company, P.C.
It's time to switch to high gear for the possible federal tax changes coming our way in 2013. Although the
future tax landscape remains foggy, planning can go a long way in minimizing the
impact of potential tax increases. As things stand today, a number of tax
increases are scheduled to take effect in 2013.
Ordinary Income Tax Rates
Tax cuts that became law in 2001 and 2003 will expire at the end of
2012 unless legislative intervention occurs. Since this is an election year,
highlighted by contention and gridlock in Congress, it is uncertain whether Congress
will pass an extension of these tax cuts before year end. It is important to
consider these changes now in your financial planning.
One of the biggest changes on the
horizon is an increase to ordinary income tax rates. The lowest marginal rate
would jump from 10 percent in 2012 to 15 percent in 2013. The top tax rate
would climb from 35 percent to 39.6 percent. In addition, actual rates will be even
higher after factoring in a new 3.8 percent Medicare tax on passive investment
income, and the 0.9 percent Medicare payroll-tax increase, both of which will
affect individual filers making more than $200,000 and joint filers with income
above $250,000.
Capital Gains Tax Rates
Cuts to capital gains tax rates also expire at the end of 2012. In
2013, the capital gains tax rate is scheduled to rise from 15 to 20 percent. In
addition, qualified dividends, which are currently taxed at capital gain rates,
are scheduled to be taxed as ordinary income once again, with a top rate of
39.6 percent.
The change in capital gains taxes will have even more of an impact
on low and high income earners. Consider that earners in the 15 percent
marginal income tax bracket currently have zero capital gains tax liability. In
2013, the capital gains tax is scheduled to increase from zero to 10 percent for
the lowest tax brackets. This change will particularly affect retirees who have
low taxable income but have long-term investments with significant gains.
After 2012, individual taxpayers with adjusted gross income over
$200,000 (or $250,000 if married filing jointly) will have an additional 3.8
percent Medicare tax added to their capital gains tax rate. Effectively, this
will increase the capital gains tax rate from today’s 15 percent to 23.8
percent in 2013.
Given these circumstances, some investors will find it advantageous
to sell assets resulting in long-term capital gains during 2012 in order to have
those gains taxed at the current lower rate.**
Estate Tax Changes
Another key issue that may affect an owner’s decision to sell in
2012 is the possibility of an increased Estate Tax in 2013. One of the
following options seems likely to play out in Congress this year:
· Do nothing.
Congress does nothing and allows the current tax law to expire December 31,
2012. If this happens, then a $1 million estate tax exemption and 55 percent
estate tax rate take effect January 1, 2013.
· Extend current tax law.
Congress extends the current tax law to 2013 and beyond. This increases the
current $5,120,000 exemption by an inflation-indexed amount for 2013. Assets
above the exemption amount are taxed at the current rate of 35 percent.
· Pass a compromise bill.
Congress passes an estate tax compromise lowering the estate tax exemption and
increasing the estate tax rate to something more in line with the 2009 numbers
of $3,500,000 and 45%. This might also include a repeal of portability between
spouses, which has been in effect for the 2011 and 2012 tax years.
· Repeal the estate tax completely. Congress
would completely repeal the federal estate tax. This seems fairly unlikely
given the current political and economic climate.
The uncertainty regarding the estate tax has prompted many
taxpayers to take advantage of 2012’s favorable gift tax opportunities,
including the ability to potentially gift up to $5,120,000 of value tax free. Gifting
can also reduce potential state death taxes that are often based on a lower
exemption amount such as Oregon.
For more information contact Michael Lortz or Erin Dulley,
Geffen Mesher & Company, (503) 221-0141.
**Note: Any
decision to sell capital assets should be based on consideration of economic
fundamentals in conjunction with your investment goals in addition to the
potential tax ramifications.
The Wall Street Journal reports that the business of
investing in portfolios of distressed single-family homes has come to the point
in its current cycle that investors who got into the game early are beginning
to cash out. Read More. 
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