November, 2012
By Gary Pittsford, CFP®
President and CEO, Castle Wealth Advisors, LLC

Most of us know that tax rates and deductions will undoubtedly be changing in 2013. We will be monitoring what is happening in Washington over the next several months, but for couples that make over $250,000 a year and individuals that make over $200,000 tax rates will probably go up and tax deductions will decrease. We have about one month left in 2012 and there are some things that need to considered while managing income taxes and protecting your family net worth. Below are some ideas to think about pertaining to pulling income and deductions into 2012 or pushing some of those items into 2013. Please remember that not every idea will apply to your particular financial situation, so as you read through the list, plan to only implement the ones that are appropriate for you.

In 2012

  • Pull additional income into 2012 if you have the option to do so. This would include bonuses, dividends, and extra cash distributions from C corporations. If you take too much income from your companies you can always loan cash back later.
  • Long term capital gains tax will probably be higher next year. There will be a new 3.8% surtax on unearned income starting in 2013 for high income persons. Therefore, long term capital gains tax will either be 15% plus 3.8%, or it will probably be 20% plus 3.8%. For all of the accounts that we manage at Castle Wealth Advisors® for our clients we will be taking a hard look at every taxable account to see if assets should be sold to take advantage of the lower capital gains tax now or is there a reason to wait until a later date. These tax decisions would have no impact on IRAs, 401(k)s, or private family foundations. Since the cost of making a sale at the custodian that we use is so low it might be beneficial to make the sale in 2012 and pay the tax at 15% this year and then in January or February we could buy back the same stock if it seems appropriate.
  • If you are thinking about gifting stock in your family business or other assets to family members this is the year to get it done. Lifetime gift exemptions have been at $5 million per person for 2011 and 2012. We expect that lifetime limit to reduce to a lower number in 2013. We are working with dozens of clients across the country in the third and fourth quarter of this year in order to make as many gifts as possible in order to protect the assets from higher taxes later. These gifts sometimes are in the form of cash or publicly traded stocks, but most of the time the gifting is in the form of stock in a closely held family business or percentage of ownership in a family limited liability company or a family limited partnership.
  • For some individuals it might be appropriate to take out of their individual retirement account more than the bare minimum for 2012. For example, if your required minimum distribution is $100,000 for 2012 you might consider taking an extra $50,000 and having it taxed at the income tax rates for 2012. You will still have a required minimum distribution for 2013 but the income you receive next year will be taxed possibly at a higher rate.
  • Don’t pay your January 2013 mortgage payment in December 2012. Because your taxes may be higher next year, wait until January to make that January mortgage payment.
  • Don’t prepay state and local taxes in December 2012 like you have in the past. Wait until January to pay those taxes.
  • If you own a business and you are thinking about buying some equipment over the next six months, you should consider buying that equipment in December of 2012. Deductions, depreciation, and bonus depreciation will probably be reduced in 2012 and that is why buying equipment today and putting it in place now would probably be a good idea. Before you go out and buy a bunch of computers, delivery trucks, or other equipment though, be sure and talk with your accountant.

In 2013

  • One way to minimize higher income taxes is to divide the income among several family members. Starting in 2013 you could consider creating a family investment company in the form of a limited liability company, a family limited partnership, or a special trust. In future years if the parents and the children are all stockholders of one of these entities, then income can be divided among all the family members. There are many ways to establish and maintain these family investment companies and it takes time for you and your advisors to pick the right options to fit your family situation.
  • If you are thinking about a large charitable gift then you might consider paying a smaller portion of that gift in 2012 and a larger portion in 2013. If your tax rates are higher in 2013 then the deduction will be more beneficial.
  • Medicare tax for employees will stay at 1.45% on your income, but a .9% new Medicare surtax will apply to incomes over $250,000 per couple or $200,000 for individuals.
  • 401(k) contributions will go up to $17,500 if you are under the age of 50, and for those over 50 the contribution can be a maximum of $23,000.

For the remainder of 2012 we will try to execute ideas that help reduce our clients potential taxes in the future and preserve their overall family net worth. In 2013, when we know what the new income tax rules will be we will undoubtedly meet with most clients in order to review income and capital gains taxes. We will also need to discuss any new taxes that will be implemented and any reductions in tax write-offs.

In 2013 gift tax exemptions will undoubtedly change but we will continue to help our clients implement gifting strategies that fit their long term business plans or family net worth transfers.

In 2013 the estate tax exemption of $5 million per person will undoubtedly be reduced to either $3.5 million or $1 million per person. When that happens it will be necessary to review wills and trusts and the provisions in those documents in order to reduce the future estate tax. It will also be important to review the ownership of each asset and the beneficiaries on retirement accounts, IRAs, and life insurance policies.

With all of the changes coming at us pertaining to income taxes, gifting exemptions, and estate taxes, it may be necessary to create a whole new blueprint to protect each family. We will be busy next year working on all these new blueprints for our clients.

If you have a question about any of the items mentioned above don’t hesitate in calling us.

Gary Pittsford, CFP®, is President and CEO of Castle Wealth Advisors, LLC. Castle specializes in helping families and closely held business owners with valuations, succession planning, estate and income tax analysis and retirement income security. Castle’s senior partners work with clients throughout the country in making logical decisions that help them fulfill their personal and business financial goals. For more information visit, call 1-888-849-9559 or e-mail Gary directly at .