Can a president bring down marginal tax rates and pay for it by giving up deductions? Yes. For example, a president could reduce tax rates by 5%, but remove the mortgage interest deduction, which may result in many paying more in taxes.
One of the ideas suggested was limiting the amount of deductions individuals can take between $17,000 and $25,000. This would take into account a vast majority of people, but the wealthy would be paying more. This would be a way a president could lower taxes, yet recapture the tax revenue elsewhere. However, this doesn’t account for what happens when you lower a tax rate. For example, if an investor has capital gains and the capital gains rate is lowered, that investor could decide to sell, creating a taxable event. Likewise, if rates were to increase, an investor could choose not to sell. There are plenty of moves the wealthy can do to avoid paying taxes.
We believe, regardless of whom wins the presidency, taxes will increase. If you have capital gains, we recommend waiting until after the election to decide if you wish to sell. However, if you are able to accelerate income into 2012, we suggest that you do so. The current maximum income tax rate is 35%, and we expect that to increase in 2013.
One aspect of taxes that hasn’t been in the forefront at the debates is the estate tax. Most are assuming that rates will reset to an exemption of $1 million. If you are fortunate enough to have the wealth to make a gift and are comfortable that you will have enough remaining assets to last through the rest of your life, you may want to take advantage of a once-in-a-lifetime opportunity to pass substantial wealth to your heirs at a reduced tax cost. If the exemption amount falls back to $1 million and rates rise to 55%, then a lifetime gift you make to your heirs by the end of the year of up to $5.12 million could save a substantial amount of your wealth from estate taxes. More than $2 million in taxes to be exact.
If you make a gift in excess of the annual gift tax exclusion limit of $13,000 per year ($26,000 per couple), you use all or a portion of your exemption that can be used at the time of death. You are required to report the gift by filing a gift tax return with the IRS. Be aware that if you make a $1 million gift and the exemption falls to $1 million, all you have done is use up your exemption during your lifetime. Therefore, you have done little to minimize estate taxes other than minimize taxes on any future appreciation in the property you gifted. It is with gifts between $1 million and $5.12 million that could potentially reap substantial estate tax savings in the future.
Keep in mind that if you make a $5.12 million gift and the exemption level remains at $5.12 million or increases, you may have accomplished nothing but keep future appreciation of gifted assets out of your estate. The potential benefits are substantial. You should, however, at least consider whether making a gift before yearend is right for you.
At Henssler Financial, we believe you should Live Ready, and that includes understanding how taxes affect your wealth. If you have any questions about your wealth, the experts at Henssler Financial will be glad to help. You may call us at 770-429-9166 or email at experts@henssler.com.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
