Download Minimizing Your Taxes Under a Cloud of Uncertainty

Minimizing Your Taxes Under a Cloud of Uncertainty
Carol Frank
Recently there has been a rash of pet business owners asking me
“Carol, given the uncertainty regarding the capital gains tax,
should I sell my company in 2012?” It’s a highly valid question
given that the top tax rate on capital gains will rise from 15% to
as high as 23.8% in 2013 - an increase of almost 60%.
Bush-era tax cuts are set to expire at the end of the year.
Republicans believe the tax cuts should be extended for all
taxpayers. Democrats believe they should be extended only for
the middle and lower classes. The fate of the Bush cuts likely
will be decided by a “lame-duck” Congress convening between
Thanksgiving and Christmas 2012. The Congress that returns
for that session will be the existing Congress – a Republican-led
House and Democratic-led Senate. President Obama will still
be in office then: either he will have been re-elected and feeling
newly empowered to enact his policies OR he will be a lameduck president who can do what he believes is right without
concern for the consequences.
Short of having a crystal ball, only time will tell just what kind
of penalty (in the form of higher taxes) an owner will incur by
waiting to sell their company. But a little research does provide
some clarity on what the experts feel will actually happen and
what we should do to minimize the effect on our taxes:
1. Sell assets to take advantage of existing capital gains tax
rates.
Owners who are considering selling their business or investors
thinking of dissolving a concentrated stock position should
consider selling assets while the top capital gains tax rate
remains at 15%. A recent study by Parametric Portfolio
Associates determined that, if asset values grow by 4% per year
and the capital gains rate increases as scheduled, an
owner/investor would have to hold assets for an additional
fifteen years to be better off than he would be had he sold the
assets initially and paid tax at the lower rate.
While the official capital gains rate increases to 20% in 2013, a
new 3.8% tax on investment income (e.g. interest, dividends,
capital gains, rents, royalties) for families whose adjusted gross
income is above $250,000 also kicks in, making the overall rate
on capital gains 23.8%.
If you are an investor, you can lock in gains and redeploy the
assets to investments that may offer stable growth and
downside protection, a strategy that might prove prudent in
uncertain times. Or, if you’d like to keep your investments
but want to take advantage of the 15% rate, you can sell a
security, recognize the gain, and immediately repurchase the
security to reestablish your position. The “wash sale” rule,
which requires investors to wait thirty days before
repurchase applies only to the recognition of losses, not
gains.
2. Receive ordinary income currently rather than in a
later year when tax rates may be higher.
When the current regime expires, the top-rate on
“ordinary” income such as wages and interest will rise from
35% to 39.6%. A business owner/investor might act to
receive additional taxable income in 2012 rather than in
later years. For example, executives could consider
exercising non-qualified stock options this year so that the
resulting income is taxed at current rates.
Next year also brings a new 0.9% Medicare tax on wages for
most joint filers with adjusted gross income above
$250,000 ($200,000 for single filers).
3. Defer discretionary deductible payments (such as
charitable contributions) to later years when they may be
worth more due to higher tax rates.
The tax benefit of a deductible expenditure increases as tax
rates increase. Therefore it may be worthwhile to defer
deductible payments until higher tax rates take effect.
4. Convert a traditional IRA to a Roth IRA
All individuals are now eligible to convert their traditional
IRA to a Roth IRA, which permits future investment
earnings to be received tax-free. In the likelihood of rising
tax rates, converting to a Roth IRA may provide significant
value. If you expect to be in the same or higher tax bracket
in future retirement years, you should consider this option
seriously.
It is an election year and much depends on what happens November
6th. Most tax experts believe Congress won’t address tax rates
before the election. After November 6 th, the current Congress
might pass another temporary extension, as happened in late 2010,
which is considered the path of least resistance – especially if it
comes with a promise of tax reform in 2013.
Carol Frank of Boulder, CO, is the founder of four
companies in the pet industry. As a Managing
Director at SDR Ventures Investment Bank, Carol
leads the team in executing pet industry transactions
including M&A, capital formation and strategic
advisory services. She is also the owner of BirdsEye
Consulting, the consummate source for pet sector
consulting expertise.
She can be reached at [email protected]