Unless legislative action occurs before December 31, 2012, the conclusion of this year will mark an end to what has been a historically low tax environment. On January 1, 2013, the marginal tax rates are poised to increase and the estate and gift tax rate and exemptions will be much less favorable. We recommend reviewing your individual situations and considering the following before the end of 2012:
Harvesting Capital Gains
The long-term capital gains tax rate is expected to increase from 15% to 20%. The new 3.8% Medicare surtax, effective January 1, 2013, also applies to capital gains. With a total potential increase of 8.8% in the long-term capital gains tax rate, you can make a strong case to recognize capital gains before the end of 2012.
Roth IRA Conversions
With the implementation of the 3.8% Medicare surtax, the opportunity to covert a traditional IRA to a Roth IRA has become even more beneficial. By completing a Roth IRA conversion before the end of 2012, there is an opportunity to save a significant amount of tax in the future.
There are a number of factors to consider before a Roth IRA conversion, and the following are just a few to review: current marginal tax rate vs. projected future marginal tax rate; time horizon; estate planning objectives; asset mix (qualified vs. non-qualified, liquid vs. illiquid); and traditional IRA balances.
Exercising Stock Options
Stock options can often consist of a significant portion of overall compensation. The potential change in marginal income tax rates at the end of 2012 should be reviewed against the timing of exercise of vested stock options. Also, beginning January 1, 2013, a new 0.9% Medicare tax will be in effect on earnings.
Lifetime Gift Exemption
The $5.12 million current gift, estate and generation skipping transfer tax exemptions may be potentially reduced to $1 million beginning in 2013. This is a reduction of $4 million and for married couples a reduction in $8 million. By making gifts before the end of 2012, you can transfer a significant portion of your estate. The transfers can be accomplished by outright gifts or gifts to trusts. However, with only three months before the end of the year, you must act quickly to set up new trusts and properly value gifts of property.
We are in the midst of very volatile times, but the favorable 2012 tax rules can still provide us many opportunities that are both beneficial and tax-efficient. We would encourage you to contact First Western Trust’s team of advisors at 303.531.8100 to discuss any of the above planning opportunities in further detail.
First Western Trust cannot provide tax advice. Please consult your tax advisor for guidance on the information contained within may apply to your specific situation.
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