Taxmageddon... Death and Taxes
"I'm not scared of dying,
And I don't really care.
If it's peace you find in dying,
Well then let the time be near."
Many of you baby boomers should be familiar with those lyrics. It's a song written by Laura Nyro and made famous by Blood Sweat and Tears. Most of us believe that when we die, we will find a sense of peace. But what we leave behind, the IRS is interested in taxing.
First lets recap what we have covered in the first two parts of our series. In part 1, we covered the deficit and the choices Congress and the President (whoever it may be) are facing. None of them are good choices and each of them bring us some fiscal pain. As a side note, last week I calculated how much money the governments debt represents for each person living in the United States. The debt is slightly over $50,000 per person and growing daily.
Last weeks newsletter covered the tax increases we are facing with the increasing tax rates for almost all taxpayers in the United States. I am confident Congress will extend the tax cuts for many of the brackets, but there will be a contentious debate regarding increasing taxes on the top two tax brackets.
This week we will discuss taxes related to capital gains, gifts and death. As a reminder, this newsletter is for the person who runs a business. My client base and thus my audience is the small and mid size business.
Many small business people go into business for economic and personal freedom. All of them have the desire to sell their business one day.....to cash out so to speak. With the expiration of the Bush Era tax cuts, the cost of "getting out" is going up and it is painful. The capital gains rate is going up from 15% to 20%. That is a 33% increase in capital gains tax. Also for that one year in which you cash out, you may have over $1 million in taxable income, so certain other deductions may be limited.
The capital gains tax is a hot political area as well. The media portrays the capital gains tax to be the rich man's play ground. You know what I mean.....this is the part of the tax code that helps the wealthy person pay less in taxes. Guys like Romney as President Obama likes to point out.
As many of you may know, I represent sellers of their businesses as part of our business offering. In my experience, I can say unequivocally that most businesses sell for more than $200,000, so if you are getting out, then you will pay 5% more in capital gain taxes in 2013 and you may lose deductions because you made so much money in that one year.
If you are lucky enough to sell your business for $3 million in 2013, your capital gains tax can be as much as $600,000 as opposed to $450,000 this year. That is a lot of money to give the government for a lifetime of hard work and one heck of an increase in taxes.
And When I Die
The tax code for death is also changing. Currently, there is a $5.12 million life time exclusion on gifts and estates. So if you want to transfer an interest in your business or other investments to your family members, then do it now, because in 2013, the exclusion drops back down to $1 million. The $5.12 million tax exclusion was passed after a very contentious debate, so it is impossible to predict with any accuracy if Congress will let it drop to $1 million or if it will be some other amount. All we know for sure is it is scheduled to be reduced to $1 million in 2013. If you want to transfer wealth, give me a call now!!! Don't wait. Business valuation experts are getting booked up and may not be able to complete their valuation of your business if you don't act now.
"And when I die,
When I'm dead, dead and gone,
There'll be one child born in our world to carry on,
To carry on."........
...And to pay your taxes.