Articles (3)
News (3)
Blogs (1)

No matter who wins in November, taxes will increase automatically for some investors. And in many ways, the most meaningful decisions in Washington will be made after the elections, but before the winners begin their new terms.

As the four Republican presidential contenders continue to campaign through different state caucuses and primaries hoping to be the party’s nominee in the November elections against President Obama, many Americans are now focusing on those elections and what they will mean for tax rates.

No matter who wins in November though, taxes will increase automatically for some investors. And in many ways, the most meaningful decisions in Washington will be made after the elections, but before the winners begin their new terms.

When the health care reform law passed in 2009, Congress approved a new tax on investment income to take effect in 2013. Beginning next year, families whose overall income is above $250,000 will pay an additional tax of 3.8 percent on taxable investment income (e.g., interest, dividends, capital gains, rents, royalties).

This additional tax will not apply to non-taxable income such as tax-exempt municipal bond interest, amounts withdrawn from qualified pension plans and IRAs, or any distributions from permanent life insurance policies (e.g., loans). As a result, tax-deferred vehicles such as permanent life insurance and annuities will become even better financial vehicles for these investors.

Perhaps the most important upcoming impact on taxes pertains to the Bush tax cuts. The lower tax rates that have been in effect for the past decade are scheduled to expire at the end of 2012. With Congress likely deadlocked until election day, the fate of the Bush cuts will be decided by a lame duck Congress convening between Thanksgiving and Christmas in 2012. The Congress that returns for that session will be the existing Congress (a Republican-led House and Democratic-led Senate) regardless of the election results.

President Obama, too, will still be in office at the end of 2012. Either he will have been re-elected, feeling newly-empowered to enact his policies, or he will be a lame-duck president who can do what he believes is right without concern for the consequences. As a result, it appears that the wealthiest Americans will not only have an additional tax on investment income beginning in 2013 but also higher tax rates.

And what about the estate and gift taxes? The estate tax exemption will drop from $5 million to $1 million and the estate tax rate will rise from 35 percent to 55 percent, with the gift tax exemption dropping from $5 million to $1 million.

Remember, the additional investment income tax, the expiration of the Bush tax cuts and the lowering of the estate and gift tax exemptions will occur automatically if Congress does nothing. With all the partisanship that has been going on in Congress during the past few years, doing nothing may have been their only accomplishment.

Now more than ever, it is important to reach out to your wealthier clients. There is still time to take advantage of the gift tax exemption amounts and utilize life insurance and annuities as more solid financial vehicles for these clients.