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Advisors: Investors should take advantage of 2012’s tax code
by Savannah Weeks
December 19, 2012 09:45 AM | 2479 views | 0 0 comments | 14 14 recommendations | email to a friend | print
High-income taxpayers and investors should be aware of and take advantage of tax provisions in three areas before the new year, according to Scott Calhoun, partner and director of wealth management at Glenmore Advisors in Buckhead. They are: investments, estate taxes and individual retirement account conversions.

Calhoun said if President Barack Obama and Congress vote to not extend tax cuts, everyone’s Federal Insurance Contributions Act (FICA) tax will be increased 2 percent. The tax has seen a 2 percent break for the past two years.

In addition, married couples who earn more than $250,000 annually or single people who earn more than $200,000 a year will see a 3.8 percent increase on investment income for Medicare taxes, called the Unearned Income Medicare Contribution Tax. This same group of earners will see a 0.9 percent increase on earned income. Calhoun said the Medicare tax raises will take effect Jan. 1.

Income taxes for said married couples whose income is more than $388,000 will increase from 35 percent to 39.6 percent.

Calhoun said if Congress votes not to extend some Bush-era tax cuts, the qualified dividend rate will also go up.

“Right now, we are subject to an arbitrarily low rate. It caps out at 15 percent,” he said.

Calhoun said the rate is currently tied to taxpayers’ normal income rate with a cap at 15 percent. This special rate expires at the end of this year. It will now be tied to taxpayers’ normal income rates, but will not have a cap.

“This means high-income earners will pay at a rate of 39.6 percent,” said Calhoun.

The rate on long-term capital gains will increase from 15 percent to 20 percent beginning next year, as well.

“Because we anticipate that the capital gain rate is going to go up, we’re looking to harvest, or sell, those assets before year-end, because we want to take advantage of the lower capital gains rate,” Calhoun said.

He said there has also been talk of capping to a dollar amount the total number of deductions a taxpayer can take in 2013 and beyond.

“If I want to make a big gift to charity, do I make it in 2012 or 2013?” said Calhoun. “The tax benefit I get next year could be less than what I get in 2012.”

Chris Wooten, managing director and market trust director at U.S. Trust’s Atlanta office in Buckhead, added, “To the degree they [our clients] have sufficient income, they should consider gifting within the family and making charitable gifts [this year].”

Calhoun said the wealthy can currently give $5.12 million under the unified credit against estate and gift tax or exemption equivalent. After that number, gifts are taxed at 35 percent. Come Jan. 1, that number will decrease to $1 million. The tax rate will also increase from 35 percent to 55 percent on gifts of more than $1 million.

The last thing Calhoun said was important to his clients is conversion of IRAs to Roth IRAs. A Roth IRA grows tax-free and can be taken out tax-free. Account holders do not have to take distributions at any time like with a regular IRA, either. However, when converting to a Roth IRA, one must recognize the amount in the IRA when converting it.

“Because of the lower tax bracket now than in 2013, a lot of our clients are making the decision to convert this year,” he said.

Wooten added, “We feel very strongly that entrepreneurs in long-term businesses have a bona fide strategy for retirement and focus on succession management.”

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