those making over $450,000 a year, New Year’s Eve brought no good news.
These high income individuals were hit with all the tax increases that
were threatened by the “fiscal cliff”. The top rate on investment
income increased by 24%; from a 35% top rate to 43.4% after including
the Medicare tax. In addition, a portion of these taxpayers’ itemized
deductions will be disallowed through the reinstatement of the Pease
maximum tax rate on long term capital gains increased by 58%. The
maximum rate under the Bush tax cuts was 15%, it is now 23.8%. The only
good news was that dividends were to be continued to be taxed as if the
dividends were long-term gains.
tough work of cutting spending has been put off for a few months. When
the budget process is re-opened we would expect that they will also be
looking for new sources of revenue. The President has proposed some
revenue raisers in each of his budgets that we expect to be re-visited
by those creating a new budget.
The proposal that would affect investors most is the proposal to limit the value of deductions.
President observes that a $100 charitable contribution saves the
richest $39.60 in taxes. If a low income taxpayer made the same $100
contribution they might be saving only $28 or even less. The
President’s four budgets have proposed limiting deductions to a maximum
of 28 cents on the dollar. Since 2001, the Congressional Budget Office
has looked at a 15 cent on the dollar maximum. The Republicans
suggested a hard cap on deductions that would render deductions above
the cap valueless. These proposals would affect leveraged investments
the hardest as expenses would be deducted at a lower rate than profits
would be taxed.
Other changes ahead
also expect a change in the taxation of carried profits interest and a
lengthening of the minimum term for GRATs. We suggest that any family
interested in wealth transfer look at GRATs now while a GRAT with as
little as a two year life is deemed acceptable. We also point out
that the Section 7520 rate is at a historic low (1%) making now an even
more attractive time to fund a GRAT.
sure there will much more to dissect as we get closer to the
negotiations but for now, act on the items we can all see coming before
it’s too late.