Now that the election is over, it looks like the expiring Bush tax cuts will indeed expire. There is a little time left before the December 31 expiration date. Taking the right steps now can result in some real tax savings.
The tax rate on long-term capital gains will increase from 15% to 20%, plus if your joint income is over $250,000, the gain and all other investment income will be subject to an additional 3.8% Medicare tax. What does this mean? If you have a $100,000 long-term capital gain, you will pay $8,800 of additional tax if you wait until 2013 to realize the gain. Take a close look at your portfolio, and if there are any investments with gains that you are considering selling in the near future, sell them before the end of this year. It will save you a lot of tax. On the other hand, if you have any losses, you may consider delaying the sale of those investments until 2013, when the loss will save you greater tax dollars.
The tax rate on qualified dividends, currently 15%, will increase to your ordinary income tax rate, which can be as high as 43.4% (39.6% regular + 3.8% Medicare). If you have dividend income, you should consider rearranging your portfolio to investments that do not generate taxable investment income, such as tax exempt municipals, variable annuities, growth stocks, or life insurance.
The $5.12 million estate and gift tax exemption will drop to $1.0 million after December 31. This is a great opportunity to transfer wealth free of federal estate or gift tax, and for states that have no gift tax, completely free of state transfer taxes. Stocks and bonds, real estate, cash, and closely held business interests are assets that many people have transferred. Another use of this exemption is the purchase of life insurance, which will generate future tax free benefits far in excess of the premium paid.
In addition to the Medicare related taxes, ordinary income tax rates will increase across the board. The current 35% rate is scheduled to increase to 39.6%, which represents a 13.1% increase. If you have any control over the receipt of ordinary income, you will be wise to consider accelerating as much as possible into 2012. This will save a lot of tax.
There are many other provisions ffecting both individuals and businesses. Each individual's situation is unique and no advice is applicable to everyone. Please contact me if you have any questions on how the changes will affect you.
