Kansas & Missouri Estate Planning

Fiscal Cliff Anomalies

They say a true compromise is when everyone walks away a little unhappy. If that’s true, then the American Taxpayer Relief Act passed by Congress and touted as narrowly avoiding a Fiscal Cliff, was the truest of compromises ... resulting in some interesting anomalies.

While no one got everything they wanted, there are some surprising winners in the deal. Business writer Kent Hoover of the Business Journal (Minneapolis-St. Paul) outlined his take on The 5 Winners of the Fiscal Business Awards:

• Small Business. Most small businesses avoided higher taxes when the threshold for increases was set at $450,000 instead of $250,000. Small business owners also should benefit from the $5.12 million estate tax exemption ($10.24 for a married couple), especially with the annual inflation adjustment. Finally, small business owners can immediately expense up to $500,000 in capital expenditures (such as new equipment), instead of having to claim depreciation over time. (Without the deal, the Section 179 annual expensing limit would have fallen to $25,000.)
• Physicians. Popularly known as the "doc fix," Congress blocked a scheduled 26.5 percent decrease in Medicare reimbursements to doctors. (Beware, though, this block is only temporary, and doctors could face a decrease in 2014.)
• Manufacturers and Technology Companies. Many of these companies will take advantage of the research and development tax credit, which provides incentives for companies to do R&D in the U.S.
• Utilities. Congress kept the capital gains and dividends rate at 15 percent for households earning below $450,000 (20 percent for households above that threshold). This is in contrast to taxation at ordinary income tax rates as high as 39.6 percent for wealthy Americans. According to Hoover, "That would have been bad news for companies, notably utilities, that offer dividends in order to attract investors and raise capital. The steady income that dividends provide loses its attractiveness when it's taxed at such a high rate."
• Wind energy, Hollywood and NASCAR. What would any tax code be without special-interests? This deal is no different. The wind energy industry gets a production tax credit for projects that begin construction this year. Hollywood studios get tax breaks for doing their television and film production in the U.S.  And NASCAR fans – for some reason Congress saw fit to extend a tax break for "motorsports racing track facilities."

For a look at some of the other industry-specific tax breaks, hop on over to The Wall Street Journal blog, "From NASCAR to rum, the 10 weirdest parts of the ‘fiscal cliff’ bill."

As the old saw goes (and is validated once again), "there are two things you should never watch while they are being made - sausage and tax law."

Reference: Minneapolis-St. Paul Business Journal (January 3, 2013,) "The 5 winners of the Fiscal Cliff Business Awards are ..."

Selling Your Business? The Clock Is Ticking.

There's only so much time left to 2012, and yet so much to do. Hopefully Congress will get to work and hammer out a deal to avoid the "fiscal cliff" (and trigger another recession).

Regardless, it certainly looks like 2013 still won't be quite as advantageous as the current tax code. This especially is the case if you're looking to make a major sale that will invoke capital gains taxation. Accordingly, you'd better get to work and get that sale completed before the ball drops in Times Square!

For business owners considering the sale of their businesses, this advice includes you. In fact, you will find interesting a recent article in The Wall Street Journal titled "Looming Tax Hike Motivates Owners to Sell."

As you likely know, the first tsunami to hit will be the automatic relapse in the tax code to pre-Bush-era days, with an effective increase in capital gains taxation from a current 15% to a less advantageous 20%. And it gets worse: the Affordable Care Act (Obamacare) tacks on an extra 3.8% to capital gains that also goes into effect next year. Bottom line: capital gains will increase to 23.8% (that's an increase of almost 60%!).

It's yet to be seen what the lame-duck Congress will do with their time or how they'll solve this problem. But it seems unlikely that Obamacare and that extra 3.8 % surcharge is going anywhere. That alone is enough to encourage some business owners to advance their sale dates to 2012.

It might already be too late to sell your business. Nevertheless, there may be time yet or other transfers besides. Looking for an example? Well it's worth noting that George Lucas didn't wait until January to sell his company, Lucasfilm, to Disney, potentially shaving $176 million off his would-be tax bill.

Reference: The Wall Street Journal (November 1, 2012) "Looming Tax Hike Motivates Owners to Sell"

Reduce Taxes By Minding Your Cost Basis

Taxation oftentimes hinges on a few fundamental numbers. One of those numbers is the “cost basis.” Given some interesting changes to the law governing cost basis, you may need to rethink your wealth transfer plans.

Investing and taxation can be tricky things, especially if you have been investing for some time. This can get even trickier when you transfer assets to loved ones or contemplate doing so.

The cost of being lazy about cost-basis elections seems particularly high right now, given that the markets have generally been trending up as the new regulations have gone into effect.

If you have investment accounts, then likely you are aware of some of the changes that have begun to take effect and will continue to roll out through 2013. One of the most obvious changes was recently addressed in a Morningstar article titled Beware the Default Method for Cost-Basis Elections.

Are you aware of the difference between the old style of "cost basis" election and the new possibilities your brokerage firm or mutual fund company is meant to offer?

Essentially, the old system of electing a cost basis was very much in the hand of the investor since they had to track and record their own cost basis on various investments. Typically, this meant averaging out the cost basis when it came for tax time on the sale of stock of differing cost basis. Now, the cost basis is directly reported to the IRS from the firm/broker.

Companies tend to offer the default means of reporting, but since information is going directly to the IRS this also means there is enough information for specific-share-identification in the cost basis election. The Morningstar article offers some interesting math to support why this actually can be advantageous for the crafty planner.

Bottom line: Any trimming you can safely accomplish can secure more favorable capital gains taxation. Why? Because this cost basis carries over into another magic taxation number - the "stepped-up basis" - when investment assets are transferred. In short, small changes add up and may affect some of the numbers when evaluating your overall wealth transfer planning.

Reference: Morningstar (March 26, 2012) "Beware the Default Method for Cost-Basis Elections"

Capital Gain Conundrums

Schedule D is so Last Year! You were used to reporting capital gains and losses on Schedule D. Now, in most cases, use new Form 8949 to report capital gain and loss transactions.

A new tax season and a new tax reporting rule for capital gains. It's not a big change but, as Robert Wood writing for Forbes reminds us, any change to something as important as the capital gains tax is worth noting, especially with tax season upon us. From the IRS news release:

New Way to Report Capital Gains and Losses

In most cases, taxpayers now use new Form 8949 to report capital gain and loss transactions. Schedule D, the form traditionally used to show these individual transactions, is now used as a summary sheet, reporting amounts for total sales price, basis and other adjustments for all individual transactions, and for figuring the tax. For securities both bought and sold in 2011, the Form 1099-B, issued by the broker, normally shows the taxpayer's basis. The information on this form will help taxpayers correctly fill out Form 8949. See the instructions for Form 8949 and Schedule D for details.

If nothing else, let this practical change remind you of the very practical reality of capital gains and losses, and what they mean to your estate planning strategies. Your goal, after all, is to leave your assets to your loved ones. However, depending on how you manage your planning, you also may be incurring unnecessary gift or estate taxes on your end… and inheritance or capital gains taxes on the recipient's end. Accordingly, bearing this in mind can allow more precise footwork with your overall wealth transfer planning (especially when it comes to the taxable basis of the assets).

Reference: Forbes (January 11, 2012) "New Capital Gains Tax Reporting For 2011 Returns"; IRS.GOV news (January 2012) "2011 Changes Offer Tax Benefits to Almost Everyone; Special Tax Payment and Reporting Requirements Apply to Many"

Selling Your Family Business... With The Tax Wind At Your Back

Whether we're coming out of the recession is still very much in debate. Nevertheless, at least for some small businesses, the balance sheets are starting to look a bit better.

Having weathered the storm, some business owners are now ready to get out. According to a recent New York Times article, 2012 is going to be the time to sell the business for some owners.

"Buy low, sell high" is conventional market wisdom. To some business owners coming out of the rut with a good year behind them, right now may be the “high sales” they’ve been awaiting. Yet for some investors right now may still be the “low buys” with an eye for growth.

Behind the scenes, however, there’s more than simple market dynamics afoot in 2012. As you may recall, it also is the last year of the Bush-era tax cuts as they were extended only until the end of 2012.

So, if you're looking to sell the business, then 2012 will offer a lower capital gains tax rate, at 15% instead of the 20% slated to fall into place come next January.

If your business IS your personal wealth, then this is real money for your future and for your family’s future.

Why are you waiting? Unless you intend to keep you family business in the family, the tax planets are beautifully (albeit temporarily) aligned with those same Bush-era tax cuts in place – and the generous Gift and Estate tax levels.

Accordingly, I recommend a consultation with your trusted accounting, legal and financial advisors without delay.

Reference: The New York Times (December 21, 2011) "Why Some Business Owners Think Now Is The Time To Sell"