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Year-End Tax Planning Before December 31, 2012 More Important Than Ever

As the end of 2012 approaches, the scheduled expiration of the Bush Administration tax cuts and favorable rates are set to expire on December 31, 2012. This will have potentially dramatic consequences for many taxpayers. Additionally changes brought about by Obamacare and consequential increases to the tax for Medicare will affect taxpayers. Unless the congress is successful in achieving agreement relating to the interplay of revenue increases coupled with a reduction in government spending, the “fiscal cliff” will be triggered which is expected to result in $600 billion worth of tax increases and across the board spending cuts.

Income Taxes:

The favorable personal income tax rates enjoyed since 2001 and 2003 will automatically expire and revert to the rates in place prior to that legislation; additionally Itemized deductions and personal exemptions will be limited. Maximum federal income tax rates for ordinary income will increase from 35% to 39.6%, tax rates applicable to most Long-Term capital gains will increase from 15% to 20%, and the income tax on Qualified Dividends will increase from 15% to 39.6%.

Medicare Tax, Two-Fold Increase.

Wages exceeding $200,000 will be subject to an additional 0.9% on the existing 1.45% Medicare tax. Additionally, unearned income (such as capital gains, dividends, interest) of higher income individuals will, for the first time ever, be subject to a new Medicare tax of 3.8% brought about by the Affordable Care Act, 2013 (Obamacare), applying to single individuals having adjusted gross income exceeding $200,000, and to married couples having adjusted gross income exceeding $250,000.

Estate and Gift Taxes:

Expiration of the Bush Tax Cuts will also raise the maximum marginal estate and gift tax rate from the present 35% rate to 55%and reduce the federal unified estate and gift tax exclusion, effective Jan. 1, 2013 from $5,120,000 to the $1,000,000 exemption in place at 2000, inflation adjusted to an estimated $1,400,000. The ability of a surviving spouse to utilize his/her deceased spouse’s unused estate tax exemption (sometimes called “portability”) will expire Jan. 1, 2013, also. And, a new surtax on larger estates will come into play, possible raising the maximum estate tax rate to 60%.

Remember that one’s “taxable estate” includes all assets regardless of whether they pass through the court process known as probate or outside of probate such as life insurance, IRAs, 401Ks, assets held in living trust; however, i.e., an asset’s passing outside of probate (retirement accounts, life insurance) does not mean that it escapes being included as part of your taxable estate.

These proposed changes present dramatic changes in tax planning strategy form what we and our clients have enjoyed in previous years. We are ready to meet with you to discuss your unique estate and income tax planning situation and develop a plan to maximize and preserve your hard earned wealth for you and your family.

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