Fred Whitaker
Without new federal legislation, the per person gift and estate tax exclusion will drop from $5.12 million to $1 million of net worth per person on January 1, 2013, making it very difficult to defer or reduce taxation on your estate. Estate and gift tax rates also will increase dramatically from 35 percent to 55 percent.
In a previous article, we looked at maximizing the current $5.12 million estate tax credit by maintaining control of business and cash flow through the use of defined benefit plans and leasing companies. Importantly, this technique not only depresses/freezes values and moves them to the next generation, it also provides current income tax benefits.
You might ask why we should be concerned with current income tax rates when looking at succession planning and when so many have lower incomes in this economy? The answer is that many of the statutes that are expiring for estate tax and negatively affect succession planning also are expiring for income tax. As Ross Perot used to say it’s “That giant sucking sound….” If the law is not changed, $1 trillion dollars annually is will come out of our economy and your business. You need to be prepared now, and possibly accelerate income and/or buying decisions to reduce the effect on you and your heirs.
Below is a chart of what would happen depending on your current bracket.
|
2012 Tax Rates |
2013 Tax Rates |
2012 Long Term Capital Gains Tax |
2013 Long Term Capital Gains Tax |
2012 Qualified Dividend Tax |
2013 Qualified Dividend Tax |
|
10% |
15% |
0% |
10% |
0% |
15% |
|
15% |
15% |
0% |
10% |
0% |
15% |
|
25% |
28% |
15% |
20% |
15% |
28% |
|
28% |
31% |
15% |
20% |
15% |
31% |
|
33% |
36% |
15% |
20% |
15% |
36% |
|
35% |
39.6% |
15% |
20% |
15% |
39.6% |
As you can see, from a succession planning point of view, any sale of your business or assets that qualifies for capital gain will receive 5 percent more federal tax. Any ordinary income in the upper brackets will receive 4.6 percent more federal tax. This applies not only for sales to third parties, but also for sales to heirs and their related entities as part of succession planning. This dramatic change starting January 1, 2013, is all the more reason to get any succession plan done by the end of the year.
In addition, I believe the most massive tax increase will apply to dividends, with federal tax rates rising 24.6 percent. Over the last 10 years of stock market volatility and low interest rates in the bond market, many investors have moved their portfolios toward dividend-producing stocks, and dividends often have been used as a lower cost method of compensating retired founders. This tax increase will be devastating for investors and the C corporations that have been paying dividends. We encourage you to review your projected 2012 income with your CPA and consider accelerating income or sales to diminish the consequences of this pending tax increase.
There are other changes that also will drastically affect your business, such as the reduction of Section 179 depreciation from $139,000 to $25,000, and the elimination of bonus depreciation. Therefore, don’t delay—now is the time to order equipment.
We will discuss this pending massive tax increase and the likely affect of election outcomes next month. In the interim, remember, we have only two and a half months left in the year to implement plans. If you are failing to plan, you are planning to fail.
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| IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any matters addressed herein. |
