Ten income and estate tax planning
strategies for 2012
Visit putnamwealthmanagement.com for the latest tax and financial planning ideas
from Putnam.
Unless legislative action occurs, 2012 marks the last year
of a historically low tax environment — for both income
and estate taxes. Beginning in 2013, taxes are scheduled
to increase, and for some taxpayers, this increase will be
substantial:
Tax item
Maximum tax rate Maximum tax rate
2012
2013
Ordinary income
35.0%
43.4%
Dividends
15.0
43.4
Long–term
capital gains
15.0
23.8
Payroll
(employee portion)
4.2
6.2
Estate and gift taxes
35.0
55.0
Tax rates reflect highest marginal rate and incorporate additional
taxes related to the health-care reform law. Health-care-related
taxes include a surtax of 3.8% on net investment income and an additional 0.9% payroll tax affecting single filers with income in excess
of $200,000, and joint filers with income in excess of $250,000.
Assumes employee payroll tax rate of 4.2% is extended for tax year
2012. If no extension occurs, the employee portion of the payroll tax
will be 6.2% in 2012.
Additionally, the federal exemption amount for estate
and gift taxes is scheduled to revert to $1 million in 2013
(from $5 million in 2012).
Ten tax-smart strategies to consider
in 2012:
1. Accelerate income where feasible
Taxpayers who expect to remain in higher tax brackets
going forward may want to consider reporting
more income on their tax return in 2012. This can be
accomplished through a number of methods including
converting Traditional IRA assets to a Roth IRA,
realizing more income from a business or partnership,
or exercising certain stock options.
2. Complete large financial transactions
Rising long-term capital gains rates and a new Medicare
surtax of 3.8% on net investment income may prompt
investors to consider completing large financial transactions — the sale of appreciated stock, real estate, or
businesses — before 2013 to take advantage of the low
15% tax rate.
3. Accelerate tax deductions into 2013
With the return of income phase-outs on itemized
deductions in 2013, clients in higher tax brackets should
consider accelerating certain tax deductions into 2012 if
possible. Examples include prepaying mortgage interest,
prepaying local property taxes, and expediting elective
medical procedures that may result in significant out-ofpocket expenses. However, taxpayers should be aware
that, if subject to the alternative minimum tax (AMT),
some of these deductions will be reduced or negated.
For example, the deduction for local property taxes
is negated if AMT applies while the mortgage interest
deduction is still available regardless of AMT status.
4. Gift appreciated assets to family members
in lowest tax brackets
In 2012, taxpayers in the lowest two brackets (10% and
15%) benefit from a 0% rate on long-term capital gains
and qualified dividends. Investors contemplating gifts to
family members may be well served to gift appreciated
stocks or mutual funds instead of cash. If the recipient
is in one of the lowest tax brackets, the asset could be
subsequently sold without any capital gains tax (before
the end of 2012). Note that this strategy is limited
depending on the size of the capital gain. For example,
if the gain is large enough, that amount may “push” a
taxpayer above the 15% income tax bracket where the
higher 15% capital gains rate will apply.
For reference, the 15% bracket begins at income levels of
$35,350 for single filers and $70,700 for joint filers.
5. Maximize retirement plan contributions
As federal budget deficits have worsened, there
is increased scrutiny on tax benefits, including the
preferred tax treatment of retirement plan contributions. Plan participants may not want to assume that
these tax benefits will be in place forever. In fact, there
has been recent congressional testimony on deficit
reduction efforts that would reduce retirement plan
contributions to certain levels based upon a percentage
of income.
6. Review estate planning documents and
strategies
It is critical for investors to review estate plans in
conjunction with changes in the tax environment. For
example, as the federal exemption amount increased to
$5 million in 2010, in many cases trust provisions had to
be amended to ensure that potential unintended consequences were avoided. Additionally, investor’s estate
plans may be well positioned for the federal estate tax,
but may not be designed effectively to avoid the impact
of death or inheritance taxes at the state level.
7. Consider significant charitable gifts
Affluent clients considering gifts may wish to move
forward in 2012 while generous tax benefits still exist.
Given escalating federal budget deficits and increased
costs for entitlement programs, the deduction for
charitable giving has faced scrutiny from lawmakers.
Additionally, it is reasonable to assume that the estate
tax environment could get worse in the future as
the federal government looks to generate more tax
revenue, so removing assets from estates now may have
advantages.
Current limitations on charitable gift deductions
Type of gift
Deduction*
Cash or equivalent
50% of AGI
Capital gain property
30% of AGI
*Assumes qualified, public charitable organization. Lower limits apply
to other organizations such as private foundations.
8. Make lifetime gifts
Individuals can gift up to $5 million over their lifetime
without incurring federal gift tax. With this limit reverting
to $1 million in 2013, removing assets out of larger estates
by making large gifts now may make sense. Another
reason for lifetime gifting is that appreciation of transferred assets post gift is also outside of the estate. That
makes gifting assets that may have depreciated in value
due to the current economic environment, such as real
estate or stocks, an attractive option.
9. C
onsider advanced wealth transfer
strategies
Individuals and families with more complex estates
should consider advanced strategies to transfer wealth
efficiently. Examples include Family Limited Partnerships
(FLPs) or Grantor Retained Annuity Trusts (GRATs).
GRATs are especially attractive currently as a result of
low IRS interest rates.
10. Explore options with life insurance trusts
to create liquidity at death
With the possibility of estate taxes increasing, families
with sizable assets may want to explore life insurance
as a means to create liquid assets at death to pay estate
taxes. Proper planning with life insurance can help families avoid liquidating other, non-liquid property such as
real estate or family-owned businesses during less-thanideal personal or economic circumstances.
Consult a qualified tax or legal professional and your financial advisor to
discuss these types of strategies to
prepare for the risk of higher taxes in
the future. Personal circumstances
vary widely so it is critical to work with
a professional who has knowledge of
your specific goals and situation.
This information is not meant as tax or legal advice. Please consult with the appropriate tax or legal
professional regarding your particular circumstances before making any investment decisions.
Putnam Retail Management
Putnam Investments | One Post Office Square | Boston, Massachusetts 02109 | putnam.comII909 272831 2/12