Smart investors are riding herd before the sunset

Nov 18, 2012 @ 12:01 am

By Bloomberg News

The race is on for wealthy Americans to save on taxes before Jan. 1.

President Barack Obama's re-election means his administration will push to let tax cuts enacted during the George W. Bush era expire for high earners, as scheduled, at year-end. Mr. Obama wants to raise the top federal income tax rate to 39.6% from 35%, boost rates on long-term capital gains to as much as 23.8%, and shrink exemptions from estate and gift taxes.

“If you have to put a movie title on what's going to happen from now until the end of the year, it would be "The Fast and the Furious,'” said Jeff Saccacio, a personal-financial-services partner at PricewaterhouseCoopers LLP. “The wise, smart people are preparing themselves for a sunset of the Bush tax cuts.”

Wealthy investors have about a month and a half to examine their investment gains and losses left over from previous years, as well as to consider ways to move income into 2012 and transfer assets to heirs, Mr. Saccacio said. Now is the time to start running the calculations, he said.

“Acceleration of investment income is clear,” said Elda Di Re, partner and personal financial services area leader for Ernst & Young LLP. “If anyone was planning on realizing a gain in the next two to three years on either securities or real estate, there's a considerable amount of money to be saved.”

An investor selling $100 of stock with a cost basis of $20 in 2012 will see proceeds — after capital gains taxes — of $88, according to an analysis by J.P. Morgan Private Bank. Next year, if Congress doesn't act, earnings from the sale will drop to $80.96 if rates rise to 23.8%. That means the stock price will need to rise by at least 9% for an investor to be better off selling in 2013.

Investors shouldn't accelerate sales of securities just to avoid a higher tax rate, said Mr. Saccacio. They should consider how long they planned to hold stocks and whether they need to re-balance. Those who decide to sell at current capital gains rates can reinvest in the securities if they remain attractive without violating so-called wash-sale rules under the Internal Revenue Service code that apply to stocks sold at a loss, he said.


Closely held businesses that have a choice of paying bonuses or dividends in 2012 or 2013 should do so before year-end, said Joanne E. Johnson, wealth adviser and managing director at J.P. Morgan Private Bank. Employees who can receive their bonus this year should do so and consider exercising stock options that are scheduled to expire, she said.

While the election provided some clarity, wealthy taxpayers still must be prepared for the unexpected before Dec. 31, Ms. Johnson said. “We don't know what the compromises are going to be,” she said.

Democrats maintained control of the Senate in the election results this week as Republicans kept their majority in the House of Representatives. That ensures continued resistance to Mr. Obama's determination to raise taxes for the wealthiest Americans in the effort to reduce the U.S. budget deficit.

Lawmakers may have to address the so-called fiscal cliff of tax increases and spending cuts that will start in January if Congress doesn't act in a lame-duck session set to begin this month.


Some tax-rate increases scheduled to take effect next year don't depend on fiscal-cliff negotiations, said Ms. Di Re.

The 2010 health care law —which the Republican presidential candidate, former Massachusetts Gov. Mitt Romney, had vowed to repeal — applies a 3.8% surtax on unearned income such as realized capital gains, dividends, and interest in 2013 for married couples making more than $250,000 and individuals earning at least $200,000.

The law also increases by 0.9 percentage points the Medicare payroll tax levied on wages for high earners.

Wealthy taxpayers with large carry-over losses remaining from 2008 and 2009 may not want to rush to sell securities before year-end, Mr. Saccacio said. They may have enough losses to offset future gains even with higher tax rates, he said.

When taxpayers' capital losses exceed gains, the extra generally can be deducted on returns and used to reduce other income, such as wages, up to an annual limit of $3,000, according to the IRS. If the total loss is more than the cap, the unused portion may be carried over to following years.


The Obama victory also may lead some millionaires who were hesitating to take advantage of current rules on gifts to fund trusts they've set up, said Linda Beerman, manager of the wealth strategies group at Atlantic Trust Group Inc. The firm is the private-wealth-management unit of Invesco Ltd.

Legislation enacted in 2010 raised the lifetime estate and gift tax exclusion for 2011 and 2012. This year, individuals can transfer up to $5.12 million — or $10.24 million for married couples — free of estate and gift taxes. Those levels are scheduled to expire at year-end, and Mr. Obama wants to set the estate tax threshold at $3.5 million while cutting the gift tax exemption to the 2009 level of $1 million.

“People are really rushing here at the end to take advantage of it,” Ms. Beerman said.

Wealthy families should consider setting up trusts under current rules that can benefit grandchildren or future generations and establish them in states such as Delaware, which let the entities exist in perpetuity, said Ms. Johnson.

In its most recent budget offering, the Obama administration proposed curtailing the benefits of such trusts as well as limiting discounts taken when transferring illiquid assets.

Decisions about making charitable contributions this year are more complicated, Ms. Beerman said. While deductions for donations probably will be more valuable next year if rates are higher, limits on itemized deductions for those with higher incomes are scheduled to be reinstated next year, she said.


What do you think?

View comments

Recommended for you

Upcoming Event

Mar 13



InvestmentNews is honoring female financial advisers and industry executives who are distinguished leaders at their firms. These women have advanced the business of providing advice through their passion, creativity, inclusive approach and... Learn more

Featured video


Why integration is essential (and how it works)

Integration has been one of the biggest fintech themes in 2017. But why (and how) does this work? Matt Brown of CAIS and Sean Mullen of Advice Period explain.

Video Spotlight

Help Clients Be Prepared, Not Surprised

Sponsored by Prudential

Recommended Video

Path to growth

Latest news & opinion

RIAs struggle to keep clients grounded amid stock market euphoria

With equities at record levels, financial advisers are confronted with realities of greed and fear.

Regulators showing renewed interest in cracking down on investment fees

SEC, Finra targeting high-fee share classes, 12b-1 fees and failure to give sales load discounts and waivers to investors.

Tax update: Brady says sales tax deduction in final bill

Taxpayers will be able to deduct state income taxes or state sales taxes in addition to property levies — up to a $10,000 cap.

Complexity of new indexed annuities causing concern

Insurers are using 'hybrid' indices as a way to differentiate themselves, but critics contend the products are less transparent, more confusing and don't add financial benefit.

Critics say regulation hasn't curbed overly rosy projections for indexed universal life insurance

They say rule didn't go far enough and more stringent measures may be necessary.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print