Income Tax Planning

At the end of July, I had the wonderful opportunity of attending a national convention in Denver, Colorado with approximately 500 other elder law and estate planning attorneys.  It was wonderful to rub shoulders with some of the top estate planning minds in the country and listen to the dissertations on the best strategies to preserve a client’s legacy.

There was a lot of discussion on the new income tax laws and how these law changes are going to affect ones wealth in the coming months.  With the estate tax exemption being as high as it is today, currently set at $5 million and indexed for inflation, there are very few people in the United States that will be exposed to this tax.  On the other hand, everyone is subject to income tax, and that is where the planning really comes into play now.

Under the Tax Payer Relief Act of 2012, the Bush tax brackets of 10%, 15%, 25%, 28%, 33%, and 35% will remain the same and are made permanent. For households making $400,000 a year (single) and $450,000 a year (joint filers and qualified widow(er)s) there will be a new 39.6% tax rate. These dollar amounts will be adjusted for inflation after the 2013 tax year.

For capital gains and qualified dividends rates the new law retains the 0% tax rate on long-term capital gains and qualified dividends, modifies the 15% rate, and establishes a new 20% rate. Beginning in 2013, the rate will be 0% if income falls below the 25% tax bracket; 15% if income falls at or above the 25% tax bracket but below the new 39.6% rate; and 20% if income falls in the 39.6% tax bracket. It should be noted that the 20% top rate does not include the new 3.8% surtax on investment-type income and gains for tax years beginning after 2012, which applies on investment income above $200,000 (single) and $250,000 (joint filers) in adjusted gross income. So actually, the top rate for capital gains and dividends beginning in 2013 will be 23.8% if income falls in the 39.6% tax bracket. For lower income levels, the tax will be 0%, 15%, or 18.8%.

In order to minimize the burden of these higher income taxes proper planning must be done.  The key is to try to stay under the threshold amounts listed above in any given year.  Most of the time this may be easy to do since ones yearly income will usually be less than the threshold amounts, but in years when you have a spike in income this becomes a big issue.  A spike in income may occur if you begin taking from your retirement accounts, or sell a business or piece of appreciated stock or real estate. It is important to realize that there are estate planning strategies, such as charitable trusts, that can mitigate or even sometimes avoid these higher income taxes.

For more information or to schedule your free consultation, contact our office today at 888.222.1328.

Contributed by MH Prescott, Flagstaff and Arrowhead Estate Planning Attorney David T. Eastman.

About Morris Hall:
At Morris Hall, we have focused our legal practice on estate planning for over 40 years.  Along with estate planning, our attorneys help clients and their families with matters of probate, trust administration, wills, power of attorneys, business planning, succession planning, legacy planning, charitable gifting and other important legal aspects.  We also have divisions in financial, real estate and accounting to help you incorporate all of your planning together, ensuring that everything works perfectly for your needs and situation. Our Arizona offices are located in Phoenix, Mesa, Scottsdale, Cave Creek, Tucson, Prescott, Flagstaff and Arrowhead.  Our New Mexico offices are located in Albuquerque, Las Cruces and Santa Fe.  Contact us today at 888.222.1328 to schedule an appointment!

This blog should be used for informational purposes only.  It does not create an attorney-client relationship with any reader and should not be construed as legal advice.  If you need legal advice, please contact an attorney in your community who can assess the specifics of your situation.