Soukup, Bush & Associates, P.C. Tax Advisory
To: Our Clients
Date: December 1, 2008
Re: Post-Election Year-End Planning for High-Income Earners (Individuals and
couples making more than $200,000 - $250,000, respectively)
Background
Now that Election Day has come and gone, we can look at what President-elect Obama has promised in the way of future tax legislation to help fine tune your year-end tax planning. Of course, we don't know what new tax legislation will pass in Congress in 2009. However, according to his website, President-elect Obama intends to:
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Raise long term capital gains (LTCGs) and dividend tax rates from 15% to 20% for individuals and couples making more than $200,000 - $250,000, respectively.
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Raise the top two tax rates on ordinary income from 33% to 36% and 35% to 39.6%. According to the current 2009 rate schedules, this will impact married filing-joint-filers with taxable income exceeding $208,850, and single filers with taxable income exceeding $171,550 - the beginning of the 33% bracket for 2009. However, the website states that couples making less than $250,000 will not see their taxes increase.
Given these stated intentions, this memo provides some post-election year-end planning strategies for you.
Strategy 1: Defer Year-End Security Capital Losses
As you know, brokers, investors and financial advisors routinely recommend creating year-end security sales to recognize enough capital losses to offset net capital gains recognized during the year, plus an extra $3,000 that can offset ordinary income. This may not be the best course of action for high-income individuals this year. Given the likelihood of higher LTCG rates in 2009, some preferable tax strategies for you for the remaining days of 2008 may be to:
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Save unrecognized capital losses for use in 2009 if higher capital gain rates are anticipated.
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Sell assets with LTCGs in the remaining weeks of 2008 to recognize those gains at 15%.
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Sell and repurchase in late 2008 appreciated LTCG securities that you intend to sell within the next several years. This will step up your tax basis to the current FMV at a low 15% tax cost.
The following present value chart shows the annualized rate of return from recognizing a capital gain today at 15% versus in the future at a 20% rate.
|
Date of Tax Payment on a Sale @ 20% Tax Rate |
Rate of Return From Paying Tax on Sale Instead on 4/15/19 @ 15% Tax Rate |
|
4/15/10 |
33.3% |
|
4/15/11 |
15.5% |
|
4/15/12 |
10.1% |
|
4/15/13 |
7.5% |
|
4/15/14 |
5.9% |
Example 1: Economics of accelerating tax payments.
Art sells a parcel of land in 2008 on a contract that calls for a payment of principal in 2009. If Art anticipates that federal LTCG rates will increase from 15% to 20% in 2009 and after, Art will gain a 33.3% return if he accelerates that gain and incurs all of the tax in 2008 (payable 4/15/09).
Strategy 2: Pay Year-End Bonuses
The possibility of higher ordinary income rates for wealthy taxpayers in 2009 may make it a good time to actually accelerate (as opposed to defer) income into 2008. With this in mind, a closely held corporation owner might want to consider paying himself (and other corporate executives) a year-end bonus or accelerating other early 2009 compensation payments into 2008. To the extent this reduces next year's income, this may prove to be a tax smart move if tax rates go up next year.
Note:
There has also been talk about increasing the ceiling (currently set at $106,800 for 2009) on the amount of income subject to the 12.4% social security tax (split 50/50 between the employer and employee). If this comes to fruition, the acceleration of compensation income to 2008 will result in even more savings (assuming 2009 income will exceed $106,800).
Conclusion
We do not have a crystal ball, so we cannot say what the tax rates will be next year. However, given the stated plans of President-elect Obama, it seems likely that high-income individuals will see higher rates if not next year, sometime in the next couple of years. Of course, the state of the economy will also significantly affect your tax planning. In any case, you may want to at least discuss applicable ideas with us, so that you can make an informed decision. Please call us at your convenience if you would like more information.
SOUKUP, BUSH & ASSOCIATES, P.C.
