Tags: Tax | Moves | us | economy

Smart Tax Moves to Make Now

Wednesday, 25 Jul 2012 09:40 AM

The depth of the looming tax increases that will impact you and the rest of the United States in 2013 should scare you more than the scene when Norman Bates dressed up as his mother and sliced Marion Crane in the shower in the movie "Psycho."

In fact, "psycho" is an apt description of the tax system today.

And it is about to get worse unless you make some smart tax moves right now.

The basic tax rate on personal income, the one special panels on news shows talk about, is going up from 35 percent to 39.6 percent. On top of that will be an additional 0.9 percent Medicare tax for top earners.

Investors who had restructured their portfolio to take advantage of the 15 percent tax rate for dividends are in for a double whammy.

The dividend tax rate is going up to the basic income tax rate of 39.6 percent, plus a new 3.8 percent Medicare tax on investment income. The total of 43.4 percent does not include any state tax.

The smart move, from a tax point of view, is to get out of dividend-paying stocks and back into growth investments. This has to be carefully planned, since there likely will be an awful lot of investors thinking the same thing.

Planning on getting into investments that will yield capital gains means facing another tax hurdle. The capital gain rate is going up also, from 15 percent to 20 percent, plus the 3.8 percent Medicare tax.

The smart tax move then is to limit the number of investments that depend on yielding gains at the beneficial capital gain rates.

Tax-free municipal bonds may be an alternative if you can be assured that the underlying municipality is not going broke. Relying on credit-rating agencies to buy municipal bonds is likely no longer a reliable way to invest.

There is a second tax system that is imposed on U.S. taxpayers. Essentially the Alternative Tax System is a flatter tax system.

It works in the background and is largely ignored by Congress. It is a stealthy tax that expands to include a wider tax base every year. Therefore, lower levels of income will be caught up in the Alternative Minimum Tax net.

Estate-tax lawyers found that 2010 was a good year for clients to die, although most clients felt that was a rather drastic way to save on estate taxes.

These lawyers now say that 2013 is a good year to stay alive, as the estate tax rate is increasing from 35 percent to 55 percent. A wealth-destroying rate of tax, particularly for people who have estates that are not easily converted to cash.

What has been overlooked in all this focus on raising taxes is any real solid discussion of why any increase in tax rates is necessary when actual experience has consistently proved that lowering taxes boosts the economy.

Besides, what are the taxes being spent on?

If our political experience tells us anything, it is that Congress will, at the most, compromise on any tax policy. Good for the politicians, but again bad for the taxpayers, non-taxpayers and the economy.

Looking at this decidedly unpalatable tax scenario and its likely outcome in 2013, a smart tax move would be to use insurance structures to allow for income and capital gains on investments to grow in a tax-free environment.

It is also a smart tax move to solve the problem of generating liquidity to pay potential estate taxes.

Insurance has enjoyed certain tax benefits since 1913. Those benefits can be used in 2013.


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