The midpoint of the year is always a good time to check whether you’re on track to achieve your goals for the year.
But this year, it’s particularly important because of a confluence of factors that could impact your finances.
That’s especially true if you have money you hope to leave your heirs, as there may be a change in the tax paid on inheritances.
“The big deal for people with money — and this is big — is we’ve got a $5 million individual lifetime (tax) exemption” that could disappear, said Jim Smith, certified public accountant in Dallas.
Here’s the background: The gift and estate taxes are separate taxes, but their rates and exemption levels are the same.
Under current law, each person can give away or leave to heirs as much as $5.12 million with no federal gift or estate tax consequence. That’s the largest exemption in history.
Gifts or inheritances greater than that amount are taxed at a top rate of 35 percent, the lowest rate since 1931.
Unless Congress acts, the federal gift and estate tax exemption will revert to $1 million on Jan. 1, and the tax rate on amounts above that will rise to 55 percent.
Financial advisors say this is a great window of opportunity for the affluent to transfer wealth.
“You don’t want to wait until the election, because you won’t have time to get appraisals, to get property transferred, to form trusts, to move assets,” said Smith, managing director at Smith, Jackson, Boyer & Bovard in Dallas. “You need to start planning right, red-hot now if you haven’t already. If you have money, you need to start looking at those assets that you may want to transfer to get them out of your estate.”
The first thing you should consider moving out of your estate are assets that currently don’t produce any income but may rise significantly in value in the future, he said. One example might be undeveloped land, Smith said.
If you have stocks that aren’t paying very high dividends now but may later rise in value, you might consider moving them into a 529 college savings plan for your child or grandchild or putting the stocks in a trust, Smith said.
However, estate planning strategies can be complicated, so consult an estate planning attorney or tax advisor before making any moves.
Another thing you should know about stocks: Unless Congress acts, the top tax rate paid by the highest earners on most dividends, currently 15 percent, is set to jump to a whopping 43.4 percent next year.
“That is a huge increase on the taxes on dividends,” Smith said. “It’s going to ream dividend income as an investment if all of that comes to pass.”
In addition, the capital-gains tax would rise from 15 percent to 20 percent if Congress doesn’t extend the Bush tax cuts.
“So if you have assets you’re contemplating selling, and they can be moved for a reasonable price between now and year end, you may want to consider that,” he said.
You can also save on your taxes by maxing out your contributions to a traditional individual retirement account or 401(k).
“Put in as much as you can, because it gets it out of current income and you’ll pay for it later,” said Ken Sibley, partner at accounting firm CliftonLarsonAllen in Dallas. “It reduces your taxes now and when you start drawing it out, hopefully then you’re drawing it out at a lower tax rate.”
But don’t make an investment decision based solely on taxes.
“Taxes are a consideration, but you still have to make sound investment decisions,” Smith said.
Meet with your financial and tax advisors now.
“Don’t wait until the last minute to try and get your trust and estate planning attorneys,” Smith said. “They’re going to be buried at the end of this year.”
Don’t forget to review other important financial areas now, too.
“Now is a great time to review your spending plan or budget and assess how you are doing,” said Wade Chessman, certified financial planner at Chessman Wealth Strategies in Dallas. “Are there adjustments you need to make in a specific category?”
While no one knows how the presidential election will turn out, you should think about what financial moves you would make in response to it.
“While they may not want to pull the trigger right now,” Smith said, “whatever they’re going to do, they may want to get their gun loaded and aimed, so that they’re ready to move.”