The Changing Tax Landscape – Part 2

Thanks for coming back to read the second part of my three-installment look at the changing tax landscape that could significantly affect your financial planning.

As we approach the halfway point of 2012, let's weigh the looming changes for income taxes, estate taxes and gift taxes set to take place beginning January 1, 2013.

The Bush-era tax cuts—enacted in 2001 and 2003—are scheduled to expire at the end of this year. Unless Congress acts, most taxpayers will see rate increases and exemption decreases. Let's highlight the three specific changes that I feel will have the biggest impact on your financial planning:

• Higher Tax Rates – Everyone will be affected, not just the highest  earners. The existing 35% bracket will be replaced by the 39.6% bracket; the 33% bracket replaced by the 36% bracket; the 28% replaced by the 33%; the 25% becomes the new 28% and the new lowest bracket will be 15%, replacing the current 10% bracket.

• Higher Capital Gains and Dividend Taxes – The current maximum federal rate on long term capital gains and dividends is 15%. Starting next year, the maximum rate on long-term gains is scheduled to increase to 20% (or 18% on gains from assets acquired after Dec. 31, 2000, and held for over five years). The maximum rate on dividends will skyrocket to 39.6%.

• Higher Estate Taxes – This is a major one that will potentially affect high net worth estates.  Unless Congress takes additional action, beginning in 2013 the gift, estate, and generation-skipping transfer (GST) tax exemptions will decrease. The current federal exemption of $5,120,000 will be reduced to $1,000,000.  Currently, any amount over the exemption is taxed at 35%; however, starting next year, not only is the exemption lowered but the rate over that exemption raised to 55% (!).

We cannot predict if Congress will or will not act to extend these Bush-era tax cuts or increase the estate and lifetime exemption scheduled to revert to $1,000,000 next year. However, with proper financial and tax planning, you can take advantage of these historically low tax rates, as well as the lifetime exemption between now and the end of the year.

How are investors preparing for these specific changes?  In our next post, we’ll show you a few ways in which high net worth families are adjusting their estate planning, tax planning and generational wealth transfer strategies in preparation.

Robert A. Connell is CEO of Apex Financial Advisors, Inc. http://www.AFA-inc.com