An Open letter to our clients
There is a lot of uncertainty in Washington right now when we hear about the “fiscal cliff”.
Absent some deals the following is a synopsis of what will happen if no deal is struck.
Estate and Gift Taxes
One thing is certain, that for the rest of 2012, an individual can give away to the next generation(s) $5 Million and a couple can give away $10 Million. In addition the Generation skipping tax exemption drops from the current $5 Million/person and $10 Million/couple to $1 Million per individual and $2 Million per couple in 2013. So, what should you do?
If you are above the current 2013 threshold ($1M/$2M), you should strongly consider making gifts to your children and/or grandchildren before the end of the year. There are a couple of caveats to that especially if you have assets that are high in value, but relatively illiquid like land or small business holdings.
A. If you think you need more than $1M/$2M to live on, you should consider how much you need to live on the rest of your life.
B. Remember, when you give it away, you lose your control over the asset and you lose the economic benefit of the asset. You cannot give it away and hold onto it. You can put it in a trust with a neutral trustee (who might be a trusted friend, advisor, attorney), but it can’t be you.
C. Consider the needs of your family and whether or not they should have the money immediately. Trusts are a great vehicle for managing their receipt of assets by others in your family and to utilize the current $5/$10 Million Generation skipping tax exemption.
D. In making gifts of land, collectibles or closely held business interests, appraisals will be needed before the end of the year. So, planning is important for such gifts.
Income taxes
In the income tax area there are many provisions that are scheduled to expire.
Capital Gains Taxes
Things like the capital gains rate will go up with no change in the law. So, it might be wise to consider selling appreciated assets now and incurring a tax rather than waiting and incurring a larger tax. But there are lots of reasons not to do that and certainly its something to think about. You’ll need to consult your tax preparer to determine if you will be better off by making those deals.
Investment Income Surtax
There is a new 3.8% medicare surtax on net investment income if your Modified Adjust Gross Income exceeds $250,000. This affects passive income receipts for S Corporation investors or LLC investors, or limited partnership investors or real estate investors as well as capital gains including from sale of one’s home in excess of the $250,000 exclusion ($500,000 for couples). So, you should consider making larger business deals in 2012 as stated above.
Higher potential rates in 2013.
If no deal is reached there will be higher tax rates for all in 2013. This would mean that it might be wise to hold off on making year end state estimated payments until 2013. However, if there are restrictions in deductions passed by Congress, then you might want to make these payments in 2012. All in all, this probably means waiting until the end of 2012 to see what happens in this regard.
Business Provisions Expiring
The R&D credit, the Work Incentive Credits, and accelerated depreciation/amortization rates are scheduled to expire at the end of the year. Without changes in the law by the end of the year, purchases or investments in these areas in 2012 would be advisable.
If you have a small business that you are negotiating a sale, you can exclude up to $10 Million if the stock was owned for more than 5 years and is qualified small business stock. After this year the exclusion goes down to 50% of the first $10 Million. Zero taxes versus 17% of the total sale is a huge difference. If you sold a small business corporation for $1 Million, you’d owe $170,000 more taxes in 2013 at least.
Generic planning tips.
If you have illiquid assets the rest of 2012 may be a good time to sell them or give them to family members in order to take advantage of lower capital gains rates and higher gift tax exclusion for 2012. Additionally, if income can be recognized in 2012 instead of 2013, it might be a good year to do that. I would say, plan deductions for 2013 since rates are higher, but with the possibility of the phase out of itemized deductions and the resurrection of the alternative minimum tax, that might not be advisable and you should have someone run the numbers for you.
Our attorneys stand ready to assist you in these decisions. If you need advise, please do give us a call.
Disclaimer.
NOTHING IN THIS LETTER IS INTENDED TO BE THE RENDERING OF LEGAL ADVICE AND SHOULD NOT BE RELIED UPON IN ANY CONTEXT. AS ALWAYS, YOU SHOULD CONSULT YOUR TAX ADVISOR TO DETERMINE THE ANSWER TO YOUR PARTICULAR SITUATION. THE VIRGINIA STATE BAR SEEMS TO THINK THIS LETTER MAY CONSTITUTE ADVERTISING. PLEASE BE AWARE THAT OUR PURPOSES FOR THIS LETTER ARE NOT CHARITABLE AND THAT IT MAY CONSTITUTE ADVERTISING. ANY STATEMENT OF SUCCESS OR FAILURE IN ANY LITIGATION PROCEEDING SHALL NOT BE TAKEN AS ANY GUARANTEE OF SIMILAR RESULTS IN YOUR SITUATION. ALL CASES ARE FACT DEPENDENT AND CASE VARY FROM ONE CASE TO ANOTHER AND YOUR PARTICULAR SITUATION IS UNIQUE AND REQUIRES UNIQUE DECISION MAKING BASED UPON A NUMBER OF FACTORS.