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New Tax Planning Opportunities for High Income Individuals

To help appreciate the planning opportunities individuals may have between now and year end, we have prepared a summary of the key tax law provisions affecting high income individuals.

Tax Provisions Which May Impact Planning Opportunities

■     Marginal ordinary income tax rates rising.

■      Medicare surtax.

■     Federal estate tax exemption decreasing and rates rising.

■     Federal gift tax exemption decreasing and rates rising.

Planning Opportunities

■       Married individuals should consider establishing non-reciprocal Spousal Lifetime Access Trusts (SLATs) to protect assets from potential federal estate taxes if the federal estate tax exemption is permanently reduced. With the current $5 million gift tax exemption, each spouse may currently gift to a SLAT, gift-tax free, more than may be possible after December 31st.  A SLAT allows the use of the gift tax exemption by the donor spouse with access to income and principal for the beneficiary spouse.

■       The purchase of a permanent cash value life insurance policy within the SLAT will allow a family to help tax diversify their future supplemental cash flow and mitigate the potential impact of the Medicare surtax and higher ordinary income tax rates, as long as the policy is not a modified endowment contract.

■       Individuals with significant qualified plan and IRA balances should review the potential income tax and Medicare surtax advantages of Roth conversions in 2012 because:

    • Although distributions from qualified plans and IRAs will not be includible in net investment income for Medicare surtax purposes, taxable distributions from qualified plans and IRAs will be includible and increase a taxpayer’s modified adjusted gross income for Medicare surtax purposes in the years taxable distributions are taken;
    • For Roth conversions after 2012, the conversion income will be includible in and increase a taxpayer’s modified adjusted gross income for Medicare surtax purposes in the year of conversion; and
    • Nontaxable distributions from Roth IRAs taken after 2012 will not be includible in a taxpayer’s modified adjusted gross income for Medicare surtax purposes.

    Individuals should understand the prudence of reviewing these planning opportunities with their advisors as soon as possible. Our tax law firm is aggressively helping clients plan for these tax opportunities.