Last month, we discussed potential devastating effects on business taxation when the Bush Era tax acts expire. We were concerned there would be no movement, and unfortunately, we were right. It has been more than a month since the election, and with only 19 days to go until the “fiscal cliff” hits, neither side has made any substantive compromise. Republicans have hinted that they will allow tax rates on the wealthy to increase if they can get entitlement reform/spending cuts, but President Obama’s proposed budget includes spending increases, relying on the winding down of the wars in Afghanistan and Iraq as proof that he provided cuts last year. The bottom line—we need to plan like the “fiscal cliff” will not be avoided.
What can you do, now that it is so late in the year?
First, go back to last month’s article. You can easily order equipment to take advantage of the business deductions that will be eliminated.
Second, accelerate income that will be taxed at a higher rate next year. If you have capital appreciation in things like buildings, stocks, etc., the tax rate next year will be 8.8% higher at the federal level (5% increase in capital gains, plus the Affordable Care Act capital gains tax of 3.8%). Most law firms still have capacity to get sales documents accomplished for real estate transactions. There are many financial buyers looking to do sale/lease back transactions at favorable rates. Stockbrokers will always take sales orders.
Third, even though appraisers are fully booked, if you can get a “Broker’s Opinion of Value” on real estate, or an accountant’s estimate on business interests, most law firms still have some capacity to help you gift/deed those to your next generation—conservatively making sure that you are below the Lifetime Gift Exemption. You would then order retrospective appraisals next year before the gift tax returns are due. It is probably on the edge of time if you wanted to do restrictive trusts for the gifts though.
Fourth, if you are charitably minded, you might consider making larger-than-normal charitable gifts before the end of the year. A large donation will reduce the size of your estate, important when considering the increased estate tax next year. Also, if you accelerate income as suggested above, a larger charitable donation will help ameliorate the extra tax you will pay. Some commentators have recommended pushing deductions into next year when rates are higher. We hold the opposite view. Every revenue compromise being proposed by the White House and generally accepted by Republicans calls for the phase out and elimination of charitable and home mortgage deductions for those making more than $250,000 per year. That means that it will be much more expensive to make charitable gifts in 2013. All charities are geared toward year-end giving, whether through their Websites, development departments with off-the-shelf Charitable Remainder Trusts that can be put in place in 2-3 business days, and/or their Donor Advised Funds, which allow you to give now and then designate over a period of years where the money may be used.
As we’ve been encouraging all year—act before it is too late. Failing to plan is planning to fail. Next month, we will update you about any tax compromises that occurred and how we should plan going forward in 2013.
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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.