By Chris Miller
With an expanding budget deficit, the addition of fantastically expensive social programs, a skyrocketing national debt and a “tax-friendly” presidential administration at the helm, many of my investors are wondering what their taxes will look like in the future. This month’s article takes a look at what’s in store for us in 2011 – and beyond.
On May 28, 2003, President Bush signed the third-largest tax cut in U.S. history, the Jobs and Growth Tax Relief Reconciliation Act of 2003. Those tax cuts, unless renewed, are set to expire on December 31, 2010. And we can be pretty sure they won’t be renewed.
Nothing is set in stone, yet – but these changes have been mentioned:
What We May See In 2011:
• An increase in the top marginal Federal Tax brackets from 33% and 35% to 36% and 39.6%.
• An increase in the Capital Gains tax rate from 15% to 20%.
• An end to favorable treatment of dividend income. Rather than the current 15% rate, expect to pay your marginal tax rate. (Up to 39.6%.)
• An increase in the estate tax from zero to as much as 55%.
Heirs of those “lucky” enough to die in 2010 will owe no estate taxes. In 2011, the Economic Growth and Tax Relief Reconciliation act of 2001 will have expired. If no additional legislation is passed, the estate tax will be assessed on estates in excess of $1 million with a maximum tax rate of 55%. Incidentally – California does not have an estate tax; a rare bit of good news.
What Could Be Waiting For Us In 2013:
• An extra 0.9% increase on W-2, (salary) income over $250,000.
• An extra 3.8% on investment income over a $250,000 threshold.
That investment income one is tricky – this particular $250,000 threshold includes all other income. So – if in 2013 a married couple earns $250,000 of salary income, $50,000 through mandatory IRA distributions, and $200,000 through rental real estate, this 3.8% will be charged on the $50,000 + $200,000; an extra $9,550 on your tax bill.
Unfortunately, Capital Gains are included in this new “investment income” concept – If the couple above also sold investment real estate in 2011 for a $500,000 capital gain, and did not complete a 1031 exchange, they would pay 3.8% on that entire amount, PLUS the higher 20% (not 15% anymore) capital gains rate. This is what I call a tax “double whammy.” This IRS is hitting one source of income with 2 different tax increases. Just these two taxes will be $119,000; a $44,000 increase! This is before recapture of depreciation (25%) and state taxes (in CA – that’s an extra 9.3%) are levied. The future could be taxing indeed – unless proper planning is done.
Source: Tax Policy Center; Urban Institute and Brookings Institution, Washington, D.C. http://www.taxpolicycenter.org .
Tax Advantaged Investments May Be More Attractive
When taxes are rising, tax-advantaged investments can become more attractive. These sort of assets are my specialty; investments backed by hard assets that feature income and growth potential along with tax advantages. These tax advantages can offer immediate tax write offs, fully or partially tax-sheltered income, or can avoid reporting a tax. (As in a §1031 exchange.) Some products can do two or more of those things.
Investing in real estate and energy has historically offered a great way to keep more of what you earn. As a bonus, they can prosper in times of high inflation as well. Many believe that higher inflation is in our immediate future. Still more think that higher taxes are. Tax advantaged investments could be a great way to address both problems.
If paying less taxes on your investment earnings appeals to you, perhaps tax advantaged investments are worth a look.
This does not constitute an offer to buy or sell any security. Securities sold through American Beacon Partners, Inc. Member FINRA/SIPC.
Christopher Miller is a Managing Director with Specialized Wealth Management in Tustin, California and specializes in tax-advantaged investments including 1031 replacement properties. Chris’ real estate experience includes work in commercial appraisal, in institutional acquisitions for a national real estate syndicator, and as an advisor helping clients through over two hundred 1031 exchanges. Chris has been featured as an expert in several industry publications, and on television, and earned an MBA emphasizing Real Estate Finance from the University of Southern California. Call him toll-free at (877) 313 – 1868.