Broker Check


While the national focus is on the upcoming election and the impact it may have on the economy, perhaps the biggest economic issue facing the nation is the pending fiscal cliff. This term refers to the confluence of major tax and spending cuts that will automatically become effective on January 1, 2013 unless Congress and the President can reach an accord. Among the most significant tax issues are the repeal of the Bush tax cuts, the re-instatement of the 2% decrease in payroll taxes, the reduction of the $5.12 million estate tax exclusion to $1 million, and the new 3.8% Medicare surtax on various forms of unearned income for individuals, trusts and estates. The automatic spending cuts total $109 billion and are applied across the board to most government agencies. This newsletter will concentrate on tax ramifications of this event.

Since the Bush tax cuts were passed in 2003 and extended in 2010, both qualified dividends and long term capital gains have been taxed at 15%. Without another extension, the rates for long term capital gains would revert back to 20%. Dividends would be taxed as ordinary income, the same as wages. Due to this probable increase in the capital gains rate, I believe it is imperative that any taxpayer who intends to sell an appreciated asset complete this transaction before the end of the year.

The purpose of the 3.8% Medicare surtax on single and married taxpayers earning more than $200,000 and $250,000 respectively is essentially to pay for Obamacare. The ramifications for many taxpayers are significant.For one, the aforementioned increase in the capital gains tax will be exacerbated by this surtax. One exception is the Section 121 exclusion for the sale of a primary residence that applies to homeowners who are looking to sell their home and excludes gains of up to $250,000 (individual) or $500,000 (married). If the house is sold in 2012, the gains in excess of these limits would be subject to only the 15% rate and the 3.8% Medicare surtax would be avoided. Two other types of income that are excluded are tax deferred annuity income and municipal bond interest. In my opinion, the imposition of this surtax is likely to escalate demand for both of these investments.

Without another extension, income tax rates will rise as much as 86% for some taxpayers with the maximum tax rate increasing from 35% to 39.6%. For those taxpayers who wish to convert an IRA to a Roth IRA, 2012 may represent the final opportunity to maximize the advantage of this favorable future tax treatment by minimizing taxes today.

Finally for those wealthy individuals who have a net worth in excess of $5.12 million, and whose objective is to transfer wealth to their family, any delay to enact strategies will have a profound impact on gift and estate taxes. This federal estate tax exemption will revert back to the 2002 level of $1 million if Congress and the President do not come to an agreement. Many estate planning attorneys are urging their high net worth clients to take full advantage of this shrinking window by implementing pro-active strategies such as the maximization of lifetime gifts to family members. There seems to be general agreement among estate planning practitioners that a planning opportunity of this magnitude for the tax efficient transfer of wealth may never exist again in our lifetime.

While it is possible that Congress and the President will agree to some changes before the end of the year, the long standing intransigence between the two branches of government does not lead to any optimism. I encourage all my clients to be pro-active in addressing strategies now that may help reduce taxes and protect their hard earned assets.


Clifford L. Caplan, CFP®, AIF®

In The News: On October 13th, I was widely quoted in an Associated Press article titled “How would candidates' tax plan affect investors”? In this article, I provided my opinion as to the impact of higher taxes that would result from the fiscal cliff.