Die now or pay later

Posted by Emily Myers on November 15, 2012

Southern Chester County Chamber of Commerce members got to the Mendenhall Inn at 7 a.m. and paid money to hear about “Doom and Gloom.”

Attorney Donald B. Lynn and Chad Fenstermacher, CPA, teamed up to give advice about impending tax changes.

Fenstermacher summarized the Federal budget dilemma as the nation heads toward the “massive fiscal cliff” as described by Federal Reserve Chairman Ben Bernanke. Put in personal terms, the national debt means the top 5 percent of taxpayers have an average income of $359,828, a share of deficit $38,889, and share of the cumulative debt $958,074. Overall, taxpayers have an average $56,713, share of the deficit of $3,315 and a share of the cumulative debt $49,006.

The challenge for an accountant is to advise clients in the context of changing legislation. He used to be able to develop a five year tax plan for clients. This year, with the tax regulations still not finalized for 2012, it is hard to advise clients for the next two months.

Given the political vicissitudes of getting tax laws passed, Fenstermacher gave general advice with the warning that individuals may have circumstances which might not apply.

“Sell long-term capital gain property to take advantage of the current 15 percent capital gain rate. Sell, then repurchase valuable stock. Consider a Roth conversion – take advantage of current low tax rates. Robert Kane, outreach director for Congressman Joseph Pitts, said he was surprised that he hasn’t heard as much from Pitts’ constituents about the impending capital gains tax rate increase as expected.”

Fenstermacher also advises if you’re under age 65, accelerate deductible medical expenses into 2012 while the 7.5 AGI floor is still available. Stack deductions. Shift investments to avoid taxable income generating the 3.8 percent Medicare surtax. Accelerate charitable giving – Donor Advised Funds. Accelerate income and defer deductions. Pay down mortgage debts.”

Lynn said the one sure way to take advantage of the $5.12 million estate tax exemption is to die before the year end, not advice he gives his clients. He projects that if new law is forged, the estate exemption will be dropped to $3.5 million based on proposed legislation. If no law is made both gift and estate tax exemption will be at $1 million.

Lynn said that the high gift and estate tax exemptions was a political bargain made in exchange for extending unemployment benefits, and that we probably won’t see that level again. Large gifts made by trust, insurance or QPRTS are not removed from the donor’s estate unless he survives the gift by three years. For the state of Pennsylvania taxes, the term is one year.

“Don’t forget annual exclusion gifts. Each person may give up to $13,000 in 2012 (Fair Market Value at date of gift) per calendar year per individual recipient without having to file a gift tax return,” he said.

Lynn also projects that “Portability” will be maintained. Portability is the ability to preserve the estate tax deduction of a deceased spouse. Before portability, a trust had to be established to preserve the deduction.

Inevitable as taxes are, as changeable as tax law is, it still beats the alternative.

About Emily Myers

Emily Myers has lived and worked in Chadds Ford for over thirty five years. She founded the parent company of Chadds Ford Live, Decision Design Research, Inc., in 1982. ChaddsFordLive.com represents the confluence of Myers' long time, deep involvement in technology and community. Myers was a founding member of the Chadds Ford Business Association and currently serves on its board of directors. Her hobbies include bridge, golf, photography and Tai Chi. She lives with her husband, Jim Lebedda, in Chadds Ford Township.