Last Minute Planning Ideas
By Rob Wrubel, CFP®, AIF®
The election is over, finally. Colorado was a “swing” state and it meant we were bombarded with negative ads for the last six months. Some of the ads turned optimistic, warm and positive in the last week or two running up to the election and I guess the candidates decided to appeal to the better part of humanity for a short time.
The election is over; the negotiations of resolving the “fiscal cliff” and US government debt issues are just beginning. Long-term, it is clear that the amount of debt issued by the United States will have to go down. Three scenarios present themselves to decrease the debt load.
- Our economy increasing at a faster pace than we have had for the past three years. The US economy has grown about 2% per year for the past three years. Decent, not great. A growing economy increases tax revenues to the government even if tax rates do not change, allowing for debt reduction. We saw this in the 90s as government debt briefly became government surplus.
- Increase tax rates. Increasing tax rates clearly helps reduce government debt, but at what price? Some argue taxes are too high now. Others say taxes are too low. Navigating the tax rate will be difficult as too high a tax increase will reduce the speed of growth in the economy. Tax rates are slated to go up next year, whether or not there is a change in the looming “fiscal cliff” issues. Rates look to be going up to at least what they were in the 90s (see number one). Higher, but not too high.
- Decrease government spending. Clearly, the percent of our economy that falls under government spending needs to come down. This can be done by cutting programs – Medicare, military and more – or by making government more efficient.
Most likely, some combined version of options two and three will happen next year and we hope that the first option comes along as fast as possible. As financial planning advisors, we see the need to discuss ideas with you, our clients, to determine what steps taken today may help conserve investments and cash over the next few months. What are some steps you should consider between now and the end of the year given what we know today?
- Review estate tax planning. Right now, the lifetime exemption of a person on an estate is $5 million. Each of us has the opportunity to give $5 million away today and not have that amount taxed at the estate tax rates. Right now, as the rules stand, that amount goes down to $1 million per person next year. Tax reform and fiscal cliff negotiations could leave that alone or come to a compromise somewhere between the two. Some people believe that the final amount could be around $3 million. The cost of not taking action could be high if you are waiting to see. Many of our clients have family members in the 80s and 90s. Assume you have a family member who is not in great health and could pass away next year. Also assume she has assets worth $1.5 million dollars. If that family member gives away $500,000 today and passes away next year, there should be no estate tax due. If the $500,000 is kept, then the estate may have a tax bill around $200,000. A visit with your financial team – your Cascade advisor, tax professional and estate attorney – could save you a lot of money.
- Accelerate capital gains. You will want to review your capital gains picture for 2012. Usually, we prefer to delay taking gains as long as possible, especially if we have investment and income reasons to keep a particular security. 2012 might be an exception. Long term capital gains and qualified investment dividends are slated to go up next year. It is possible in the worst case fiscal cliff scenario that some of these preferred items could be included in current income and taxed at income tax rates. Investors with highly concentrated positions should consider selling some percentage of shares to reduce the position. Too often, these shares are held as a result of tax issues and not rational investing standards. The prospect of higher taxes in the future should help to move some of these positions out of the portfolio. Of course, do not make all of your investment decisions as a result of tax planning.
- Delay taking losses. Portfolio losses could be more valuable in future years than in this year if tax rates increase. The offsets of losses to either income or capital gains could be useful to preserve even though we often recommend offsetting gains and losses in any one year if there are no other significant issues to consider.
There is still time to assemble your tax, legal and investing team to make smart decisions prior to the end of the year. Take a few minutes before Thanksgiving to speak with us about ways to be informed about options you have to grow, preserve and pass along your hard earned and growing wealth.
Rob Wrubel CFP®, AIF®, is a Senior Vice President, Investments with Cascade Investment Group, member FINRA & SIPC. Cascade Investment Group is not a tax or legal advisor. You should always consult with your tax advisor or attorney before taking any actions that may have tax consequences.