2013 will bring some changes in the tax laws, and planning for them could save you a few headaches later on. At the end of 2012, the Bush era tax cuts are set to expire and estate and gift tax exemptions will be reduced to $1 million. Additionally, there is a possibility that grantor and dynasty trusts advantages could be reduced.
If you took advantage of any of these incentives or benefited from the cuts in the past, you’ll want to examine your situation for this year and do some planning. You may need attorneys to draft documents or have valuations prepared. You may want to consider making gifts now to have those count in the current tax year while the gift exemption is at $5 million. It may be the last opportunity to save a significant amount in federal and state estate and gift tax.
It’s also a good time to implement grantor retained annuity trusts (GRATs), because there’s a possibility that the incentives could be cut back if current proposals go through. Additionally, there are possible changes proposed for generation-skipping transfers that would limit the duration of the GST tax exemption to 90 years, and so would reduce the value of dynasty trusts.
It’s a good idea to take a look at your financial situation and be prepared to accelerate income and defer expenses based on how the end of this year plays out. Here are a few recommendations:
1. Be alert for the new 3.8% Medicare surtax on investment income, which includes rents, annuity income, taxable interest, dividends, and passive royalties. You may want to consider shifting this income into 2012, if possible. It may be advisable to reduce net investment income and modified adjusted gross income in 2013. There are several strategies you could use, such as gain harvesting, Roth conversions, and retirement distributions.
2. Consider increasing your itemized deductions into 2012. This may be your last opportunity, since there’s a good chance that itemized deductions may be limited in 2013.
3. Determine if your investment portfolios should be reallocated.
It’s prudent to run projections on a variety of different options and scenarios to see what steps could save money, taking into account the scheduled upcoming changes as well as the potential changes if current proposals pass.