Dental News - The investment tax landscape: Countdown to 2013

Dental Tribune USA

Wed. 19 December 2012

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In December 2010, Congress extended the so-called Bush-era tax cuts by passing the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. For many dental practices and high-income households, this has helped to relieve the uncertainty, but it kicked the can down the street to 2013.

For investors, the legislation may represent not true reform but a stay of potential tax increases. While it's true that federal tax rates on income, qualifying dividends, and capital gains have been extended through the end of the 2012 tax year, many of the issues that influenced the tax rate extensions will continue to be the subject of heated discussion. As a result, our orthodontic clients and their investments have been granted a reprieve while Congress works toward sound tax and economic reform.

The ‘can’ won't stay kicked down the road forever

Why should you look at the time between now and 2013 as an opportunity? Because the U.S. budget deficit is at levels that both political parties recognize can't be sustained long-term. In 2010, a presidential budget commission recommended addressing the problem through a combination of spending cuts and tax increases. Though the proposals didn't get enough support to be submitted to Congress, the deficit problem hasn't gone away.

Even if Congress can agree on budget cuts, the possibility of higher taxes in the future can't be ruled out. This why you should look at the time between now and 2013. Any time you have the opportunity to reduce taxes paid and still remain within the guidelines, you have the potential to save more, increase you lifestyle and/or have a greater impact on your retirement goals.

There are several categories of investors who should be paying particular attention to the planning process in the coming years. They include orthodontists with investments that have appreciated substantially in value; retire professionals who rely on dividends and bonds to provide them with ordinary living expenses; and orthodontists who are considering investing in the newly issued stock of a small business.

Capital gains and dividends

The tax cut extensions gave investors who have large unrealized capital gains some breathing room. Rather than a top tax rate of 20 percent, long-term capital gains will generally continue to be subject to a maximum rate of 15 percent.

If you own investments, such as your practice, that have appreciated substantially in value and that now represent a large portion of your total net worth, you have another chance to examine whether it makes sense to sell the practice before the end of 2012.

Taxes obviously are only one factor in making such a decision regarding selling your practice or highly appreciated assets. However, if you've been considering selling an anyway, you've got some time to plan and gradually implement a strategy for doing so.

Two points worth remembering:

1. Unless further action is taken, the top long-term capital gains rate will increase to 20 percent after 2012.

2. Even at the increased level, the rates on those gains would still be relatively low.

To paraphrase Mark Twain, no one is safe when Congress is in session, and there's no guarantee that the top capital gains rate after 2012 might not be increased beyond the scheduled 20 percent maximum.

Other key points to remember:

1. Qualified dividends will continue to be taxed through 2012 at the long-term capital gains rates rather than as ordinary income.

2. The higher your tax bracket and the more reliant you are on dividends for your income, the more you should be aware of the potential impact if that income were subject to higher taxes.

3. Doing a “what-if “analysis may be helpful if you are uncertain the role or impact dividends may have on your portfolio.

2013 and beyond

The nation's financial pressures will almost certainly mean continued adjustments to the tax code as 2013 approaches. Though there are no guarantees about what will happen when the new provisions expire, investors generally have another chance to fine-tune their planning efforts while taxes remain historically low. If a bird in the hand is worth two in the bush, why not get expert help in taking advantage of the opportunities available now?

(Source: RG Capital)

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