Thoughts on Tax Planning

As we approach the half-way point of 2012, it is a good time to step back and examine the changes in tax laws scheduled to take place at the end of the year. The shifting sands of expiring laws and ongoing legislative posturing present us with a unique set of uncertainties and opportunities that need to be thoughtfully navigated to capture benefits and avoid potential damage.


In late December of 2010, as the Bush-era tax cuts were about to expire, Congress and the President signed into law a two year tax package. This package extended the Bush tax cuts, which included across the board reductions in marginal tax rates, reductions in capital gains and dividends tax rates, and many other breaks to which we’ve grown accustomed over the last decade. This law also established a favorable, but temporary, framework for gift and estate tax with a two year window set to expire on 12/31/2012. Additionally, the Affordable Care Act, passed in 2010, increases Medicare taxes for high earners starting in 2013.

If taxes increase as the current law prescribes, the drag on the economy will be extremely burdensome. (The Congressional Budget Office estimates this potential drag to be north of 3%!) At the same time, we are running unsustainable budget deficits, which if not reduced soon, could drive the government’s borrowing cost to unsustainable levels. Regarding tax policy, we find ourselves between the proverbial rock and a hard place, but the good news is that we can’t stay here long. A compromise has to be reached.

Best Guess for 2012

Few expect the laws to expire without further tweaking and manipulation by our friends in Washington. Both Congress and the President have expressed their intentions, and while they are vastly different, one can reasonably assume several things:

  • Tax rates will go up for those making $250,000 per year
  • Dividend and Capital Gains taxes will increase marginally
  • Lifetime gift and estate exemptions will find permanency in some level lower than the current law

While there is great uncertainly around future tax law, there are also some great planning opportunities that could prove to be very beneficial under a range of possible scenarios in 2013.

Estate Planning

The tax package passed in December of 2010 had especially favorable gift and estate tax provisions. The estate tax exclusion (the total amount of inheritance that could pass tax free) increased to $5M per person, while the tax rate on amounts above $5M was reduced from 45% to 35%. Importantly, gift and estate tax exclusion amounts were unified, so $5M (adjusted for inflation the current amount is $5.12M) could be given away while the donor is alive, if he or she was so inclined.

This opened the door for significant lifetime planning opportunities for families with taxable estates. Many chose to make significant gifts and use the total of their exclusion - $5M per person, $10M per couple – now rather than at their death.

The decision to take full advantage of this lifetime gifting allowance will look especially shrewd if the amount is lowered in 2013. This opportunity remains open till the end of the calendar year, and looks especially attractive for Tennessee residents, as our own state gift tax is being repealed retroactively for 2012.

Gifting strategies can be crafted in many ways, shapes, and forms, to take full advantage of the tax law without breaking the bank, or creating unintended consequences for the family.

Income Tax Planning

Given that marginal tax rates for income, dividends, and capital gains could move higher in 2013, and a Medicare tax of 3.8% will apply to all investment income for those couples earning over $250,000 per year, any opportunity to shift income into 2012 and pay taxes at 2012’s lower rates may be a savvy move.

For business owners, opportunities may include paying bonuses in December instead of January or delaying onetime deductible expenses until 2013.

Investors may consider selling positions and realizing capital gains in 2012 at a 15% rate, rather than deferring gains and paying a higher rate (slated to be as high as 23.8%) in the future. In addition, higher rates may make municipal bonds and tax sheltered accounts more attractive.

Corporate executives will need to reexamine their compensation packages and stock awards, as deferred compensations programs may not be as advantageous under new tax rates. Exercising stock options in 2012 may also prove to be a smart move, as would making an 83(b) election on grants of restricted stock.


While the usefulness of these strategies is based on certain assumptions, we make no claim to have a crystal ball on these issues. Care must be taken to examine each individual family’s circumstances and goals in order to make the proper choices in this ever changing environment. Our goal has always been to provide a deep integration of investment strategy with tax planning, charitable gifting, and estate planning for each family we serve. In this time of tax uncertainly, one thing we know for sure is that the need for such integration will only increase going forward.

Posted by Jay Healy at 11:28 AM
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