Post-Election Thoughts on Taxes



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We have been spending much of our time the past few years watching Washington and waiting for clarity or at least guidance.  Well, we have one piece of uncertainty out of the way, as Barack Obama has been reelected for a second term.  However, it seems like déjà vu all over again as the election resulted in a repeat of the status quo with Democrats still controlling the Senate and Republicans, the House of Representatives.

At least with the election behind us, our elected representatives can return to the business of the nation rather than the election.  Unfortunately, early indicators have done nothing to improve our future vision and we have begun to see post-election posturing about taxes and spending which look an awful lot like the pre-election posturing about taxes and spending.

From  an investment perspective, there remains a great deal of uncertainty about the implications of tax and spending changes and their effects on the economy, so we  are inclined to retain our long-term perspective with respect to our portfolios.

On the other hand, there is a certainty that high income taxpayers will see at least a 3.8% increase in taxes on unearned income and a 0.9% increase in payroll taxes, as a result of the healthcare legislation.  In addition to these increases, we think there is a high probability that our clients and high income taxpayers in general will see an increase in marginal tax rates for ordinary income, and quite possibly dividends and capital gains.

So, what are we doing for our clients and what should you be thinking?

It makes sense to accelerate income into 2012.  This is clearly a good move for earned income and investment income.  With the possible/likely increase in taxes on dividends, it probably makes sense for those of you with small businesses to pay dividends in 2012, rather than waiting to see what happens next year.  If you have stock options that you anticipate exercising in the near future, it will make sense to consider exercising in 2012 rather than waiting.  Also, for those who have not yet made Roth IRA conversions, 2012 is a good year to act.

Since marginal tax rates are likely to rise next year, the conventional wisdom would be to defer deductions until 2013, when rates will be higher and the deduction more valuable from a tax perspective.  We think this probably makes sense, but there have been suggestions of creating a cap on itemized deductions or the President has proposed capping the value of deductions at a lower rate.

Unfortunately, there are a lot of moving targets in the tax area and all of these decisions are complicated by the continuing uncertainty.  In any case, whether considering accelerating income or deferring deductions, taxpayers need to crunch the numbers for their own particular circumstances before taking action.

Finally, as we have discussed previously, there are changes in store in the estate and gift area.  Estate tax exemptions are expected to be lower than the current $5 Million limit and most also expect that the gift tax exemption will decline significantly, perhaps returning to a $1 Million limit.  So, for those with the financial ability to make sizable gifts to their family members, 2012 may see the end of a terrific gifting opportunity which may not be seen again.

We will be evaluating these issues on a comprehensive basis for our Horizon clients and will be in touch if we have any particular recommendations for you and your particular circumstances.  Our first impression is that most folks will be best served by not taking any action, but it all depends on your situation.  If you have questions about your plans or your portfolio, please call us and we are happy to discuss them with you.  If you are not a Horizon client, we will also be glad to talk with you, or you should discuss these matters with your financial advisor and/or CPA as soon as possible.

Larry Maddox, CFP®, CPA
Larry founded Horizon Advisors, LLC in Houston, Texas in 1999 with fellow business partner Joe Thomson. He collaborates with our wealth management team and other external advisors to provide comprehensive wealth management services.

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