PARAGON Wealth Strategies Newsletter: PARAGON Perspectives

I have been taking an informal survey over the last several months. When conducting client meetings, I have been asking clients what they believe is likely to happen with future tax rates. With few exceptions, of the dozens of people I've asked, the majority believe that taxes are going to go up, and some believe significantly. Most cite all of the spending they feel like our government is doing as the basis of this belief.

Regardless of your viewpoint on this issue, however, the facts are the facts: without legislative changes, tax rates ARE scheduled to go up in 2011 and future years, and depending on your circumstances, the increase may be impactful. Below are the issues we believe our clients will be most exposed to. While this list is by no means comprehensive, hopefully it will serve as warning of, and the need for planning for, tax issues that may be on the horizon.

1. Income Tax Rate Increases

Unfortunately, unless our Congress makes changes when they resume discussion on this issue in November, all of the current income tax brackets are scheduled to increase as the "Bush Era Taxcuts" expire. Here are the scheduled increases:

Current Tax Bracket New Tax Bracket

10% 15%

15% 15%

25% 28%

28% 31%

33% 36%

35% 39.6%

2. Capital Gains & Dividends Rate Increases

There are two impactful issues in this category. First, capital gains taxes will increase. Rates are scheduled to increase from 0% to 10% for income-earners in the 15% income tax bracket and below. For higher wage earners, the current 15% capital gains rate increases to 20%. Additionally, the special treatment that "qualified" dividends have received for several years - being taxed at rates equal to capital gains (15%) - goes away. Instead, ALL dividend income will now be taxed at the taxpayer's income tax rate (see item #1). Paragon is mindful of these increases and taking proactive actions in 2010 for tax and portfolio structure to try and minimize these issues as much as possible.

3. Estate Tax Rate Increase

We never thought we'd see what's been dubbed the "Throw Mama from the Train" year come to fruition, but it has. Currently, for individuals who die in 2010, there is NO estate tax due, regardless of the size of the estate. However, in 2011, assuming no legislative changes, the current law "sunsets" and returns to 2001 levels, resuming an exclusion amount of only $1 Million per person, and tax rates at 55%. The question is: How quickly can you get to an estate of a million dollars? When you add up all of your retirement accounts, home, death benefit proceeds of life insurance you own, annuities, real estate and personal property - most of our clients can get to, or above, a million dollars relatively quickly. One could then say that 2010 is the year to die, but we don't consider that a viable planning strategy! Instead, having an up-to-date estate plan is all the more important. Please contact our office if your circumstances indicate that we should discuss this issue further.

4. Medicare Surtax of 3.8% begins in 2013

Most of the previous items may be familiar to you, since we've known they were potentially coming for years. The Medicare surtax is new, however, only just being put into fruition from the recently-enacted health care laws signed by President Obama as a part of the Patient Protection and Affordable Care Act, and the Health Care and Education Reconciliation Act.
Starting in 2013, clients whose Modifed Adjusted Gross Income (MAGI) exceeds $200,000 for single individuals, or $250,000 for married individuals filing a joint return, will be affected by the surtax. MAGI is calculated to be a taxpayer's regular AGI, plus any foreign income excluded from the AGI. The 3.8% Medicare surtax is imposed either on net investment income or on the amount of MAGI over the threshold amount, whichever is less.
While certainly Paragon has a number of clients affected by the MAGI levels alone, a couple of other considerations make it increasingly more likely that additional clients will be affected in the future. Similar to the Alternative Minimum Tax (AMT) rules, unless Congress passes additional legislation to index the MAGI limits for inflation, more and more clients over time will fall into the income levels affected by this rule.

5. Roth Conversions - Time is Running Out

Also, for anyone considering a Roth conversion, the income realized from that transaction could cause the individual to become subject to the Medicare Surtax just mentioned above. Since both investment income, as well as Roth conversion transactions, could cause a client to be subject to this new Medicare surtax starting in 2013, Paragon is all the more mindful of the importance of tax efficient strategies.
Particularly if you have felt that a Roth conversion strategy might be in your future, we would encourage you to explore that planning with us now instead of waiting. This year and only this year, if you convert assets from a traditional IRA to a Roth IRA, you may choose to pay the tax up front for tax year 2010 - OR you may choose to divide the tax between tax year 2011 and 2012.

Ultimately, with the upcoming changes in the tax laws, the math behind making the Roth Conversion decision can be rather complex. This is one of the features of the new technology that Paragon is bringing to the table for our clients - a sophisticated financial planning engine that can run multiple scenarios to help you make these decisions with confidence. Give us a call if you need help running the Roth Conversion Scenarios - because time is running out on this option and once it is gone, it is probably gone forever!

Curious how all of these changes might affect you?

The Tax Policy Center through the Urban Institute and Brookings Institution have put together a very helpful online calculator. This calculator provides the most common sample taxpayer scenarios for quick reference, or the ability to customize to ones's personal tax situation. In addition to comparing current laws to the upcoming higher rates if the laws sunset, the calculator also shows the ncome taxes due under President Obama's proposed 2011 Budget. The tax calculator can be found at http://calculator.taxpolicycenter.org.

Individuals should seek advice from their tax professional and/or financial advisor regarding their particular circumstances; our office is pleased to recommend local CPA professionals or work with your existing tax planning team in order to coordinate strategies and implementation.

All information contained herein is obtained from sources deemed reliable but not guaranteed. No specific tax or legal advice is given nor intended.