Ashleae Beling, Forbes.com: Tax Hikes Hit Trusts Hard, Beneficiaries Pull Money Out:
Folks with trusts, and that includes widows and the disabled, not
just the ultra-wealthy, have been hit with a double tax whammy this
year. First the 3.8% Obamacare tax that applies to net investment income
kicked in Jan. 1. Then, the American Taxpayer Relief Act was signed
into law on Jan. 2, imposing income and capital gains tax hikes on
trusts akin to those on the wealthiest taxpayers. The top income tax
rate is now 39.6%, up from 35%, and the top capital gains rate is now
20%, up from 15%.
The kicker: these taxes hit a trust on any income it does not
distribute over just $11,950, far less than the $400,000/$450,000 ATRA
and $200,000/$250,000 Obamacare thresholds for individuals.
“It’s hitting where it really shouldn’t,” says Laurie Hall, an estates lawyer and head of the Wealth Management Group at Edwards Wildman in Boston. “These increases weren’t intended to hit people with income below $200,000, and they will.”
Here’s why. Most trusts (non-grantor trusts) pay tax on capital gains
and accumulated income that stays in the trust, while the beneficiaries
pay tax on income that is distributed to them. So trusts—even
relatively small ones—will be hit with the 23.8% capital gains rate (the
20% rate plus the 3.8% Obamacare tax), even if the beneficiary himself
would be squarely in 15% capital gains territory. “Going forward you
have to think the trust is going to be hit with the extra 8.8%,” says
Hall.
See Ashleae Beling's full article Tax Hikes Hit Trusts Hard, Beneficiaries Pull Money Out, Forbes.com, January 9, 2013.
Paul Bonner and Alistair M. Nevius, Congress passes the fiscal cliff act,
Journal of Accountancy:
Pulling
back from the “fiscal cliff” at the 13th hour, Congress on Tuesday
preserved most of the George W. Bush-era tax cuts and extended many
other lapsed tax provisions.
Shortly before 2 a.m. Tuesday, the Senate passed a
bill that had been heralded and, in some quarters, groused about
throughout the preceding day. By a vote of 89 to 8, the chamber approved
the American Taxpayer Relief Act,
H.R. 8, which embodied an agreement that had been hammered out on
Sunday and Monday between Vice President Joe Biden and Senate Minority
Leader Sen. Mitch McConnell, R-Ky. The House of Representatives approved
the bill by a vote of 257–167 late on Tuesday evening, after plans to
amend the bill to include spending cuts were abandoned. The bill now
goes to President Barack Obama for his signature.
“The AICPA is pleased that Congress has reached an
agreement,” said Edward Karl, vice president–Tax for the AICPA. “The
uncertainty of the tax law has unnecessarily impeded the long-term tax
and cash flow planning for businesses and prevented taxpayers from
making informed decisions. The agreement should also allow the IRS and
commercial software vendors to revise or issue new tax forms and update
software, and allow tax season to begin with minimal delay.”
With some modifications targeting the wealthiest
Americans with higher taxes, the act permanently extends provisions of
the Economic Growth and Tax Relief Reconciliation Act of 2001, P.L.
107-16 (EGTRRA), and Jobs and Growth Tax Relief Reconciliation Act of
2003, P.L. 108-27 (JGTRRA). It also permanently takes care of Congress’s
perennial job of “patching” the alternative minimum tax (AMT). It
temporarily extends many other tax provisions that had lapsed at
midnight on Dec. 31 and others that had expired a year earlier.
The act’s nontax features include one-year extensions
of emergency unemployment insurance and agricultural programs and yet
another “doc fix” postponement of automatic cuts in Medicare payments to
physicians. In addition, it delays until March a broad range of
automatic federal spending cuts known as sequestration that otherwise
would have begun this month.
Among the tax items not addressed by the act was the
temporary lower 4.2% rate for employees’ portion of the Social Security
payroll tax, which was not extended and has reverted to 6.2%.
See full article by Paul Bonner and Alistair M. Nevius, Congress passes the fiscal cliff act,
Journal of Accountancy,
January 1, 2013.
Jerry L. Ripperger & Brian D. Hector: ESOPs: a plan to help business owners avoid "taxmageddon":
The potential massive tax increases looming in 2013 will be felt by
many taxpayers, but they could take an especially hard toll on business
owner clients who have plans to sell. With nearly 80 percent of their
net worth tied up in the value of the enterprise1, such business owners could lose a significant amount of assets which they have spent a lifetime amassing.
On the horizon
If Congress allows the Bush-era tax cuts
to expire in 2013, long-term capital gains rates will increase to 20
from 15 percent. On top of that, the health care reform act will impose
a new 3.8 percent tax
on capital gains for certain individuals in 2013, bringing the capital
gains tax to 23.8 percent. The jump to 23.8 from 15 percent is a 60
percent increase.
Higher income taxpayers will also experience a reduced benefit from
itemized deductions if these tax cuts expire. The net effect could boost
their capital gains tax rate to 25 percent from 23.8 percent. Further,
Congress and President Obama are discussing reducing deductions in
other ways.
Then there are state taxes. Some, like California or New York,
already have high capital gains tax rates, some as much as 8-10 percent,
which high income taxpayers would pay in addition to the increased
Federal rates. Consequently, for the business owner who sells his or
her business in 2013 as part of a succession plan, the collective tax
increases could wipe out as much as 30 to 35 percent of the wealth the
owner worked for decades to build up in the business and accumulate for
retirement regardless of whether the owner’s stock is redeemed or sold
to a third party.
Enter the ESOP Advantage
There is a way to help business owner clients soften (and in some
instances completely eliminate) the impending tax blow and unlock
substantial assets by using an employee stock ownership plan.
Because of their special tax features, ESOPs allow owners to sell their
stock and diversify their wealth on a tax-favorable basis, while
effectively retaining control of their business.
See full article by Jerry L. Ripperger & Brian D. Hector at ESOPs: A Plan to Help Business Owners Avoid "Taxmageddon", LifeHealthPro, Dec. 10, 2012.
