The race is on for wealthy Americans to save on taxes before Jan. 1.
President Barack Obama’s re-election means his administration will push to let tax cuts enacted during the George W. Bush era expire for high earners, as scheduled, at year-end. Obama wants to increase the top federal income tax rate to 39.6 percent from 35 percent, boost rates on long-term capital gains to as much as 23.8 percent, and shrink exemptions from estate-and-gift taxes.
“If you have to put a movie title on what’s going to happen from now until the end of the year it would be: ‘The Fast and the Furious,’” said Jeff Saccacio, a personal financial services partner at New York-based PricewaterhouseCoopers LLP. “The wise, smart people are preparing themselves for a sunset of the Bush tax cuts.”
Wealthy investors have about a month and a half to examine their investment gains and losses left over from previous years, as well as to consider ways to move income into 2012 and transfer assets to heirs, Saccacio said. Now is the time to start running the calculations, he said.
“Acceleration of investment income is clear,” said Elda Di Re, partner and personal financial services area leader for Ernst & Young LLP in New York. “If anyone was planning on realizing a gain in the next two to three years on either securities or real estate, there’s a considerable amount of money to be saved.”
Capital GainsAn investor who sells $100 of stock with a cost basis of $20 in 2012 would see proceeds -- after capital gains taxes -- of $88, according to an analysis by J.P. Morgan Private Bank. Next year, if Congress doesn’t act, earnings from the sale would drop to $80.96 if rates rise to 23.8 percent. That means the stock price would need to rise by at least 9 percent for an investor to be better off selling in 2013.
Bonuses, DividendsClosely held businesses that have a choice to pay bonuses or dividends in 2012 or 2013 should do so before year-end, said Joanne E. Johnson, wealth adviser and managing director at New York-based JPMorgan Chase & Co. (JPM)’s private bank unit. The tax rate on dividends may jump to as much as 43.4 percent next year from 15 percent now with the expiration of Bush-era tax cuts and levies set to take effect from the health-care law.
While the election provided some clarity, wealthy taxpayers still must be prepared for the unexpected before Dec. 31, Johnson said. “We don’t know what the compromises are going to be,” she said.
Fiscal CliffDemocrats maintained control of the U.S. Senate in the election results this week as Republicans kept their majority in the House of Representatives. That ensures continued resistance to Obama’s determination to raise taxes for the wealthiest Americans in the effort to reduce the U.S. budget deficit.
Some tax-rate increases scheduled to take effect next year don’t depend on fiscal-cliff negotiations, said Di Re of Ernst & Young. The 2010 health-care law, which Republican presidential candidate Mitt Romney had vowed to repeal, applies a 3.8 percent surtax on unearned income such as realized capital gains, dividends and interest in 2013 for married couples making more than $250,000 and individuals earning at least $200,000.
Payroll TaxThe law also increases the Medicare payroll tax levied on wages by 0.9 percentage points for high earners.
Estate TaxLegislation enacted in 2010 raised the lifetime estate-and- gift-tax exclusion for 2011 and 2012. This year individuals can transfer up to $5.12 million --- or $10.24 million for married couples -- free of estate and gift taxes. Those levels are scheduled to expire at the end of 2012 and Obama wants to set the estate tax threshold at $3.5 million while dropping the gift-tax exemption to $1 million as it was in 2009.
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