Tax increases under a 2nd Obama Administration
President Barack Obama’s re-election means his administration will push to let tax cuts enacted during the George W. Bush era expire for high earners, as scheduled, at year-end. Obama wants to increase the top federal income tax rate to 39.6 percent from 35 percent, boost rates on long-term capital gains to as much as 23.8 percent, and shrink exemptions from estate-and-gift taxes.
Wealthy investors have about a month and a half to examine their investment gains and losses left over from previous years, as well as to consider ways to move income into 2012 and transfer assets to heirs.
Capital Gains
An investor who sells $100 of stock with a cost basis of $20 in 2012 would see proceeds (after capital gains taxes are hiked) of $88. Next year, if Congress doesn’t act, earnings from the sale would drop to $80.96 if rates rise to 23.8 percent. That means the stock price would need to rise by at least 9 percent for an investor to be better off selling in 2013.
Investors shouldn’t accelerate sales of securities just to avoid a higher tax rate, said Saccacio, who is based in Los Angeles. They should consider how long they planned to hold stocks and whether they need to rebalance. Those who decide to sell at current capital gains rates can re-invest in the securities if they remain attractive without violating so-called wash-sale rules under the Internal Revenue Service code that apply to stocks sold at a loss, he said.
Bonuses, Dividends
Closely held businesses that have a choice to pay bonuses or dividends in 2012 or 2013 should do so before year-end. The tax rate on dividends may skyrocket next year from 15 percent now with the expiration of Bush-era tax cuts and levies set to take effect from the health-care law.
Employees who have a choice to receive their bonus this year should do so and consider exercising stock options that are set to expire, she said.
Surtax on unearned income
The 2010 health-care law applies a 3.8 percent surtax on unearned income in 2013 for married couples making more than $250,000 and individuals earning at least $200,000.
Payroll Tax
The law also increases the Medicare payroll tax levied on wages by 0.9 percentage points for high earners. Also, Obama's tax deduction of 2% on the employee portion of Social Security is due to end on 12/31. Apparently there is little in the way of support for a further pushing of the payroll deduction.
Estate Tax
Legislation enacted in 2010 raised the lifetime estate-and- gift-tax exclusion for 2011 and 2012. This year individuals can transfer up to $5.12 million free of estate and gift taxes. Those levels are scheduled to expire at the end of 2012 and Obama wants to set the estate tax threshold at $3.5 million while dropping the gift-tax exemption to $1 million as it was in 2009. That is an estimated estate tax increase of $372,600 (based on a lower taxable thrreshold and a 23% capital gains rate).
Capital Gains
An investor who sells $100 of stock with a cost basis of $20 in 2012 would see proceeds (after capital gains taxes are hiked) of $88. Next year, if Congress doesn’t act, earnings from the sale would drop to $80.96 if rates rise to 23.8 percent. That means the stock price would need to rise by at least 9 percent for an investor to be better off selling in 2013.
Investors shouldn’t accelerate sales of securities just to avoid a higher tax rate, said Saccacio, who is based in Los Angeles. They should consider how long they planned to hold stocks and whether they need to rebalance. Those who decide to sell at current capital gains rates can re-invest in the securities if they remain attractive without violating so-called wash-sale rules under the Internal Revenue Service code that apply to stocks sold at a loss, he said.
Bonuses, Dividends
Closely held businesses that have a choice to pay bonuses or dividends in 2012 or 2013 should do so before year-end. The tax rate on dividends may skyrocket next year from 15 percent now with the expiration of Bush-era tax cuts and levies set to take effect from the health-care law.
Employees who have a choice to receive their bonus this year should do so and consider exercising stock options that are set to expire, she said.
Surtax on unearned income
The 2010 health-care law applies a 3.8 percent surtax on unearned income in 2013 for married couples making more than $250,000 and individuals earning at least $200,000.
Payroll Tax
The law also increases the Medicare payroll tax levied on wages by 0.9 percentage points for high earners. Also, Obama's tax deduction of 2% on the employee portion of Social Security is due to end on 12/31. Apparently there is little in the way of support for a further pushing of the payroll deduction.
Estate Tax
Legislation enacted in 2010 raised the lifetime estate-and- gift-tax exclusion for 2011 and 2012. This year individuals can transfer up to $5.12 million free of estate and gift taxes. Those levels are scheduled to expire at the end of 2012 and Obama wants to set the estate tax threshold at $3.5 million while dropping the gift-tax exemption to $1 million as it was in 2009. That is an estimated estate tax increase of $372,600 (based on a lower taxable thrreshold and a 23% capital gains rate).
posted by Nick Pennewell, CPA at 9:07 AM
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