The English poet, John Donne, many years ago wrote, “Send not to know for whom the bell tolls. It tolls for thee.” Donne eloquently made the case that a loss to anyone is a loss to all. Similarly, although you may not see an immediate increase in your taxes as a result of the so-called “American Taxpayer Relief Act,” the overall economic impact of the tax increases under the Act will, in some ways, impact us all.
Following is a smattering of some of the changes in the tax law arising from the new tax law:
- The top income tax rate for married couples earning $450,000 and for single persons earning $400,000 has increased from 35% to 39.6%;
- For taxpayers in the 39.6% tax bracket, the capital gain tax rate has been increased from 15% to 20%; this higher rate also applies to dividends;
- Personal exemptions and itemized deductions will again be phased out for married couples earning more than $300,000 and for singles earning more than $250,000;
- Employee’s federal withholding for Social Security and Medicare will return to 7.65%, up from 5.65%.
Undoubtedly these increased taxes will have an economic impact, and only time will tell the extent of the impact. In any event, it is likely all Americans will be affected.
If you are concerned about high income tax rates, there are actually some strategies which you can implement to reduce the impact of these higher rates. Through certain types of trusts referred to as non-grantor trusts, income may be allocated, and thus taxed, on the returns of other persons, such as children or parents, who are in lower income tax brackets, thereby mitigating the impact of these higher tax rates. And you do not even necessarily need to be in the top brackets to make these strategies worthwhile. If you would like to discuss with us the options available to spread income out among other persons in lower brackets, call us to see if these strategies might work for you. (Note: In order for these planning strategies to work, you must be in a position to allow another person to determine to what extent you will be able to use a portion of your income.)
On the estate tax front, last year’s $5.12 million estate and gift tax exemption has now become permanent. Of course, all “permanent” means in Washington is that it is the law until Congress passes a new law in its place, which we have found to be a fairly common occurrence. Nevertheless, for now this means that every U.S. Citizen and all legal resident aliens may now make lifetime gifts and/or death bequests of a combined total of $5.25 million. So for most of us, estate taxes are a thing of the past. But for those whose estates may exceed the $5.25 million exemption, the tax rate has increased from 35% to 40%, a still-confiscatory tax for those impacted by it.
For those who are concerned with the potential impact of the estate tax, there are many estate tax planning strategies to choose from to suit your style. For such strategies to be most effective, it is best to begin before “the bell tolls for thee.”
If you want to fight back against the recent tax increases, or against some long-standing taxes, please call (702) 938-2244 and ask for David Grant, Bob Morris or Mark Dodds and we will be happy to schedule a meeting or you may contact us through our contact form on the right side of this page.