Tax Extender Bill Passed by House and Senate

The Senate has finally acted on the Bill that the House passed earlier in the month to extend many taxpayer friendly income tax provisions which previously expired at the end of 2013. Unfortunately, the extension will only have a two week shelf life and therefore will expire again on December 31, 2014. The President is expected to sign the bill into law before the end of this week.
Due to how long it took for Congress to act on these extensions, it is most likely that the start of the tax season and the date in which tax returns can start to be filed with the IRS will be extended to late January or early February (similar to last year when Congress also allowed politics to delay implementation of needed tax legislation).
Many of the favorable business related provisions can be applied without the need for transitional application rules. However, individual provisions including the ability for those over 70 to take tax free distributions from individual retirement accounts for charitable purposes will need special rules given that most taxpayers have already taken their annual required minimum distributions (RMDs) for 2014.
Below is a summary of the provisions applicable to individuals that are part of the Senate Bill. In addition to the provisions listed below, there are also over 30 provisions related specifically to businesses.
• Tax credit for purchasing health care insurance
• Tax deduction for expenses of elementary and secondary school teachers
• Exclusion from gross income of imputed income from the discharge of indebtedness for a principal residence
• Equalization of the exclusion from gross income for employer-provided commuter transit and parking benefits
• Tax deduction for mortgage insurance premiums
• Tax deduction for state and local general sales taxes in lieu of state and local income taxes
• Tax deduction for contributions of capital gain real property made for conservation purposes
• Deduction from gross income for qualified tuition and related expenses
• Tax-free distributions from individual retirement accounts (IRAs) for charitable purposes
• Tax credit for residential energy efficiency improvements
• Tax credit for energy efficient new homes
• Tax credit for energy efficient appliances
• Increased expensing allowance for business property including computer software and depreciation of qualified real property
• Additional (bonus) depreciation of business assets and the election to accelerate the alternative minimum tax (AMT) credit in lieu of bonus depreciation

Please contact your advisor or tax professional to discuss how these provisions may apply to your particular situation or circumstances.

Large Capital Gains and Tax Shock

Whenever you are dealing with a large sales transaction (sale of a business, large stock sale, etc.) taxes are a key driver. This is more true today than ever, due to changes in the tax laws. The impact of higher income on the limitation of tax deductions, the surtax, higher capital gain taxes all resulting in gains being taxed at an effective tax rate of nearly 25% versus 15% not that long ago.

Advance planning can potentially reduce the tax impact by considering tax strategies including: 

         Use of charitable trusts to reduce the overall tax impact and timing of recognition

         Consideration of installment sales to defer taxes

         Family trust sales

         1031 (like-kind exchanges) to defer taxability

         Finally do “deferred sales trusts” make sense and are they viable?

Overarching Takeaways

It is important to understand that these tax deferral strategies are complex and could have significant tax risk if not properly structured. One of today’s hot topics is the “Deferred Sales Trust” transaction which is gaining interest due to the current higher effective tax rates. These trusts need to be considered in light of numerous risks including validity of the trust, the transaction, changing future tax rates, and transaction costs. Essentially these transactions are structured in a way that allows a complete sale with all sales proceeds being realized but allowing the seller to use the installment method to spread out the tax while still knowing that the proceeds are secure.

Telemus Wealth Advisors Year-End Reminder

The clock is ticking, but like Alice we cannot see what lies at the end of the rabbit hole. With pending elections, expiring tax provisions, exploding debt and a weak economy, the only certainty is that no one knows what the final tax structure will look like in 2013. Despite this lack of clarity about future tax laws, employing a wait-and-see approach to tax planning will likely lead to payment of excess income taxes, a diminished financial legacy, and other lost opportunities that could have been prevented or mitigated with advance tax planning.

The Playing Field

Without Congressional action in 2012, existing tax laws will revert to the tax structure that existed in 2001, resulting in higher gift, estate and income taxes. These tax increases are compounded by two new taxes created under the Patient Protection and Affordable Care Act, which will take effect in 2013. These new taxes are (i) a tax of .09% on certain wages and self-employment income, and (ii) depending on an individual’s income level, a tax of 3.8% on investment income. A brief summary of the potential reversion to 2001 tax laws include:

• Individual tax rates will increase, with the highest individual tax bracket climbing from 35% to 39.6%. In conjunction with the new 3.8% tax on investment income, the maximum rate will climb to 43.4% for certain individuals. The lowest tax bracket will increase from 10% to 15%.

• Federal estate and gift taxes rates will rise from 35% to 55% and the exemption will drop from $5.12 million to $1 million.

• Preferential tax rates on long term capital gains, currently at 15%, will increase to 20%. Dividends will lose their preferential treatment and will instead be taxed as ordinary income.

• Itemized deductions will be limited and many new taxpayers will be subject to the Alternative Minimum Tax.

Whether the government allows the country to revert to this 2001 tax structure is likely dependent on the November elections. Each Presidential candidate has his own vision for the future and widely differing views on who should bear the tax burden. Barack Obama has stated that under his tax plan the “wealthy” would feel much of the impact from the changes in the tax structure. Mitt Romney has stated that he wants a 20% reduction in tax rates across-the-board, but given his goal of making the tax reduction revenue neutral, it will be a challenge to actually obtain such a reduction. The candidates’ views also differ on estate taxes, with Romney stating that he wants to eliminate the estate tax and Obama stating that he would like to keep the estate tax, but lower the exemption to $3.5 million and institute a higher tax rate. The Congressional elections could be even more determinative of future tax laws than the Presidential election. With such uncertainty, it is impossible to predict with any accuracy what the final tax structure will look like in 2013 and beyond.

The takeaway is that given the uncertain tax future, it is imperative to take advantage of beneficial provisions in the existing tax structure as soon possible, while they are still available.

Meet With Your Tax Professional

It is important to meet not only with your tax preparer, but also your financial team including your financial advisor, attorney and tax professionals. A coordinated, multifaceted strategy is needed especially if you have a net worth over $5 million or if you are the owner of a closely held business. Some strategies to consider include:

• Many of the income tax provisions have thresholds such that if you can manage to stay below them you can avoid some of the new taxes, including the 3.8% investment income tax created under the Patient Protection and Affordable Care Act, or potential increased tax rates under Barack Obama’s tax proposal for being deemed “wealthy”. Transferring asset ownership among family members may be a way to avoid these increased taxes, thanks to current friendly gift tax provisions. Family limited partnerships may also be a way to avoid future estate tax increases while simultaneously tempering the impact of income tax increases.

• It may be beneficial to sell assets with built-in long term gains prior to the end of 2012, especially if such assets were to be sold in the next 1-3 years, given the potential tax increase on capital gains expected in 2013 and beyond.

• Due to the complexities of the Alternative Minimum Tax it is important to calculate taxes under various scenarios especially when considering strategies such as accelerating bonuses or other income into 2012 versus 2013. For cash basis taxpayers, the timing of billings and related revenue recognition strategies should be considered together with overall income planning. For all of the aforementioned reasons and many others, it is crucial to begin your tax planning as soon as possible.

• Conversions of 401(k)s and regular IRAs into Roth accounts , under which qualified distributions are tax-exempt, deserve a serious consideration in 2012.

• Make sure you have maximized your annual gift tax exclusions, which for 2012 are $13,000 per recipient. With spousal gift splitting this means you can give $26,000 per recipient. Note that under the current tax laws, direct payments of medical and tuition are not treated as gifts for these limitations. Proper tax planning also includes a charitable giving strategy. Gifting of certain appreciated assets to qualified charities or organizations will make even more sense if tax rates increase, and as a method to avoid the new Medicare investment tax.


Opportunities exist but time is running out. Please consult with your advisor and plan for the future whatever it may be.

“I wanted a perfect ending. Now I’ve learned, the hard way, that some poems don’t rhyme, and some stories don’t have a clear beginning, middle, and end. Life is about not knowing, having to change, taking the moment and making the best of it, without knowing what’s going to happen next. Delicious Ambiguity.” Gilda Radner

Andrew Bass, CPA, PFS, CWM Chief Wealth Officer/Managing Director


Telemus Investment Management, LLC, Telemus Wealth Advisors, LLC, and Beacon Investment Company, LLC, registered investment advisors, are wholly-owned affiliates of Telemus Capital Partners, LLC. Telemus Investment Brokers, LLC, member FINRA and SIPC, is a wholly-owned affiliate of Telemus Capital Partners, LLC