Tax Road Ahead: What You Need to Know to Plan for the Future

Although I am a Certified Financial Planner™, financial advisor and principal in a CPA-based Registered Investment Advisory firm, for most of my career I have also served as a Certified Public Accountant.

So I know well that this is the time of year when CPAs burn the midnight oil, many working feverishly to complete 2011 corporate and personal income tax returns. While their time is, by necessity, focused on scores of details about the previous year (2011), there’s also great interest as well as great uncertainty in what’s happening with taxes for this year—and the next.

A recent interview with Rick Taylor, the partner in charge of tax with our affiliate, Wipfli LLP, gave us an overview of possible changes within the tax arena in the near future. Rick believes that, “there will be NO new tax legislation this year. Next year at this time, the Bush tax cuts will have expired, the estate tax will be back at the rates established in 2000, and the tax increases resulting from the Health Care Act will be active. Congress will then retroactively pass a tax bill in the spring or early summer. Regardless of who is elected, taxes will go up.”

In fact, under current tax laws, the top rate on ordinary income (including interest income) is now scheduled to increase from 35% to 39.6% in 2013. Long-term capital gain tax rates will jump from 15% to 20% for most taxpayers. And qualified dividend income will go from being taxed at 15% to 39.6%. Not only that, but most investment income will be subject to an additional 3.8% tax for many taxpayers. And corresponding increases in gift and estate taxes will mean that the top estate tax rate again increases to 55%, while the bar for establishing estates/gifts subject to taxes recedes from the $5 million level to the $1 million mark, as it was years ago.

So, what might taxpayers want to do in 2012?

Well, many should at least consider the following steps to stay ahead of these changes:

  • Accelerating more income and capital gains into 2012 from 2013 and beyond, to take advantage of the current rates; and/or
  • Making more and larger gifts in 2012, in anticipation of changes in 2013; and/or
  • Conversion of some traditional IRA dollars into Roth IRA, to leverage tax-free growth now.

Uncertainty is today’s reality

In mid-January, the Wall Street Journal’s Weekend Investor cover story, “The Road Ahead for Taxes” asked more than two dozen veteran tax experts, from tax preparers, independent investment advisors, professors and former top officials from the Treasury Department and the IRS, four powerful questions about what’s coming. Summary responses are:

What will be the top rate on income for 2013? Most respondents believed it will remain at 35% (perhaps as a result of a one-year extension of current rates). Several suggested it could be as high as 40%.

What will be the top rate on long-term capital gains for 2013? Most expected it would hold at 15%, although some guessed 20%. (Note: These estimates excluded the 3.8% tax on investment income that takes effect for some during 2013).

What will be the 2013 estate-tax exemption and the top estate and gift-tax rate? Universally, those questioned believed the exemption will remain at five million dollars , and most believed the rate will remain at 35%. Clint Stretch, a principal with Deloitte Tax in Washington, noted he believed the estate-tax rate is far more likely to change than the exemption.

When will we know what the 2013 rates will be? While one lone respondent thought Congress could pass a one-year extension of new 2012 rates before the election, most believed no action would be taken until at least December 2012 and many felt the spring/early summer of 2013 was more likely.1

I think Rick’s counsel was spot on, though even he admits there is no perfect knowledge of the future. I encourage us all to keep our eyes and ears open on the road ahead, and be ready to act accordingly.

Wipfli Financial Advisors, LLC (“Wipfli Financial”) is an investment advisor registered with the U.S. Securities and Exchange Commission (SEC); however, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. Wipfli Financial is a proud affiliate of Wipfli LLP, a national accounting and consulting firm. Information pertaining to Wipfli Financial’s management, operations, services, fees and conflicts of interest is set forth in Wipfli Financial’s current Form ADV Part 2A brochure and Form CRS, copies of which are available from Wipfli Financial upon request at no cost or at Wipfli Financial does not provide tax, accounting or legal services. The views expressed by the author are the author’s alone and do not necessarily represent the views of Wipfli Financial or its affiliates. The information contained in any third-party resource cited herein is not owned or controlled by Wipfli Financial, and Wipfli Financial does not guarantee the accuracy or reliability of any information that may be found in such resources. Links to any third-party resource are provided as a courtesy for reference only and are not intended to be, and do not act as, an endorsement by Wipfli Financial of the third party or any of its content or use of its content. The standard information provided in this blog is for general purposes only and should not be construed as, or used as a substitute for, financial, investment or other professional advice. If you have questions regarding your financial situation, you should consult your financial planner, investment advisor, attorney or other professional.
Nate Wenner
Nate Wenner

CPA, PFS, CFP®, CIMA® | Principal, Senior Financial Advisor

Nate Wenner, CPA, PFS, CFP®, CIMA®, is a Principal and Senior Financial Advisor with Wipfli Financial Advisors in Minneapolis, MN. Nate specializes in financial planning for high-net-worth individuals and small businesses, focusing on retirement distribution planning, estate planning and business succession planning.

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Tax Road Ahead: What You Need to Know to Plan for the Future

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