Don’t Overlook Accelerating Ordinary Income and Taking Advantage of Current Estate Tax Provisions

This is the final part of our series on pending tax legislation and how it can affect you.

John C. Scott, CPA/ABV, AEP, Tax Partner

Another opportunity that should be noted is accelerating ordinary income into 2012. Perhaps the best way to do this would be to convert a traditional IRA to a Roth IRA in 2012, if a conversion otherwise made sense. Ordinary income could also be accelerated by selling bonds with accrued interest in 2012 or selling and repurchasing bonds trading at a premium. Finally, you might consider exercising non-qualified stock options in 2012.

And last, but certainly not least, take advantage of the current estate tax provision. The estate tax exemption is currently $5,120,000 per person and will revert to $1,000,000 on January 1st, 2013 unless Congress acts.

The President is suggesting a $3,500,000 exemption. The potential reduction in the estate tax exemption is resulting in many clients making large gifts, in trust, for their family. In some instances the trusts are for the spouse, children and grandchildren and in others just for children and younger generations.

Most experts would define the savings at 35%, 45% or 55% of the amount gifted over $1,000,000. On a $5,000,000 gift the savings may be $1,800,000 ($4,000,000*45%).

Source: AICPA

We’ve covered a lot of information in these past four blogs. If you need clarification or assistance in planning now for what could happen in 2013, we welcome your call.