Election years are the worst times to try to predict the future of the law, because so many promises are being made by candidates who may have no intention of keeping them when they win in November. Just what exactly are we to believe and how are we supposed to chart our course?
Tax rates are probably going up no matter who wins the White House and Congress. Our national debt and government spending far outstrip current revenues. For a graphic (and depressing) illustration of this, check out www.usdebtclock.org. There, before your very eyes, you can see how our national debt is growing by millions of dollars per minute. Given this reality, you can be pretty sure that taxes are going up in 2013.
So where will they hit us, and what proactive moves can we make now?
If you own traditional IRAs and have some spare cash, you could be in for a great opportunity. Sometimes it makes sense to convert your currently tax-deferred traditional IRAs into Roth IRAs that will never be taxed in the future. The catch is that you will have to pay some tax at the time of conversion. Talk with your financial planner about this one.
Even if you convert your traditional IRA to a Roth, it may be subject to estate tax upon your death. Watch out for increasing rates here, too. Right now, you can pass $5.12 million worth of assets free of federal estate tax (though not free of Hawai'i estate tax--the Hawai'i exclusion is $3.5 million). Of every dollar over and above the $5.12 million, 35 cents goes to the IRS. Under current law, that will change dramatically on Jan. 1, 2013. As of that date, the federal exclusion will drop to $1 million, and the tax rate will soar to 55 percent--and that is if Congress does nothing--they could make it worse.
If you own more than $1 million worth of assets, and you can support your lifestyle on less than all you own, now is the time to think about making gifts to your children and grandchildren or to charity. Those gifts can be structured in ways that will probably cut a large chunk out of your eventual tax bill. We can give you some very good ideas about how to structure those gifts in ways that can make them painless for you and that can make a world of difference for your loved ones.
Scott A. Makuakane and Roya J. Deyhim are estate planning attorneys with the law firm of Est8Planning Counsel LLLC. Contact Est8Planning Counsel LLLC at 891-8881 or www.est8planning.com.