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Telemus Wealth Advisors Year-End Reminder

Telemus Wealth Advisors Year-End Reminder

The clock is ticking, but like Alice we cannot see what lies at the end of the rabbit hole. With pending elections, expiring tax provisions, exploding debt and a weak economy, the only certainty is that no one knows what the final tax structure will look like in 2013. Despite this lack of clarity about future tax laws, employing a wait-and-see approach to tax planning will likely lead to payment of excess income taxes, a diminished financial legacy, and other lost opportunities that could have been prevented or mitigated with advance tax planning.

The Playing Field

Without Congressional action in 2012, existing tax laws will revert to the tax structure that existed in 2001, resulting in higher gift, estate and income taxes. These tax increases are compounded by two new taxes created under the Patient Protection and Affordable Care Act, which will take effect in 2013. These new taxes are (i) a tax of .09% on certain wages and self-employment income, and (ii) depending on an individual's income level, a tax of 3.8% on investment income. A brief summary of the potential reversion to 2001 tax laws include:

• Individual tax rates will increase, with the highest individual tax bracket climbing from 35% to 39.6%. In conjunction with the new 3.8% tax on investment income, the maximum rate will climb to 43.4% for certain individuals. The lowest tax bracket will increase from 10% to 15%.

• Federal estate and gift taxes rates will rise from 35% to 55% and the exemption will drop from $5.12 million to $1 million.

• Preferential tax rates on long term capital gains, currently at 15%, will increase to 20%. Dividends will lose their preferential treatment and will instead be taxed as ordinary income.

• Itemized deductions will be limited and many new taxpayers will be subject to the Alternative Minimum Tax.

Whether the government allows the country to revert to this 2001 tax structure is likely dependent on the November elections. Each Presidential candidate has his own vision for the future and widely differing views on who should bear the tax burden. Barack Obama has stated that under his tax plan the “wealthy” would feel much of the impact from the changes in the tax structure. Mitt Romney has stated that he wants a 20% reduction in tax rates across-the-board, but given his goal of making the tax reduction revenue neutral, it will be a challenge to actually obtain such a reduction. The candidates' views also differ on estate taxes, with Romney stating that he wants to eliminate the estate tax and Obama stating that he would like to keep the estate tax, but lower the exemption to $3.5 million and institute a higher tax rate. The Congressional elections could be even more determinative of future tax laws than the Presidential election. With such uncertainty, it is impossible to predict with any accuracy what the final tax structure will look like in 2013 and beyond.

The takeaway is that given the uncertain tax future, it is imperative to take advantage of beneficial provisions in the existing tax structure as soon possible, while they are still available.

Meet With Your Tax Professional

It is important to meet not only with your tax preparer, but also your financial team including your financial advisor, attorney and tax professionals. A coordinated, multifaceted strategy is needed especially if you have a net worth over $5 million or if you are the owner of a closely held business. Some strategies to consider include:

• Many of the income tax provisions have thresholds such that if you can manage to stay below them you can avoid some of the new taxes, including the 3.8% investment income tax created under the Patient Protection and Affordable Care Act, or potential increased tax rates under Barack Obama's tax proposal for being deemed “wealthy”. Transferring asset ownership among family members may be a way to avoid these increased taxes, thanks to current friendly gift tax provisions. Family limited partnerships may also be a way to avoid future estate tax increases while simultaneously tempering the impact of income tax increases.

• It may be beneficial to sell assets with built-in long term gains prior to the end of 2012, especially if such assets were to be sold in the next 1-3 years, given the potential tax increase on capital gains expected in 2013 and beyond.

• Due to the complexities of the Alternative Minimum Tax it is important to calculate taxes under various scenarios especially when considering strategies such as accelerating bonuses or other income into 2012 versus 2013. For cash basis taxpayers, the timing of billings and related revenue recognition strategies should be considered together with overall income planning. For all of the aforementioned reasons and many others, it is crucial to begin your tax planning as soon as possible.

• Conversions of 401(k)s and regular IRAs into Roth accounts , under which qualified distributions are tax-exempt, deserve a serious consideration in 2012.

• Make sure you have maximized your annual gift tax exclusions, which for 2012 are $13,000 per recipient. With spousal gift splitting this means you can give $26,000 per recipient. Note that under the current tax laws, direct payments of medical and tuition are not treated as gifts for these limitations. Proper tax planning also includes a charitable giving strategy. Gifting of certain appreciated assets to qualified charities or organizations will make even more sense if tax rates increase, and as a method to avoid the new Medicare investment tax.


Opportunities exist but time is running out. Please consult with your advisor and plan for the future whatever it may be.

“I wanted a perfect ending. Now I've learned, the hard way, that some poems don't rhyme, and some stories don't have a clear beginning, middle, and end. Life is about not knowing, having to change, taking the moment and making the best of it, without knowing what's going to happen next. Delicious Ambiguity.” Gilda Radner


Telemus Investment Management, LLC, Telemus Wealth Advisors, LLC, and Beacon Investment Company, LLC, registered investment advisors, are wholly-owned affiliates of Telemus Capital Partners, LLC. Telemus Investment Brokers, LLC, member FINRA and SIPC, is a wholly-owned affiliate of Telemus Capital Partners, LLC

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