Planning Options if Individual Tax Rates Rise to Pre-2003 Levels

If Congress takes no action with respect to individual tax rates prior to 2013, then individual tax rates will revert automatically to their pre-2003 levels, which would mean that the highest marginal individual income tax rates will jump from 35% to 39.6% (a comparison of the 2012 and estimated 2013 individual marginal income tax rates, assuming a reversion to pre-2003 levels, are attached above).  In addition, if tax rates revert to their pre-2003 levels, the tax rate on long-term capital gains (for non-corporate taxpayers) will jump from a 15% maximum rate in 2012 to a 20% maximum rate in 2013 (these rates also apply to net long-term capital gains that flow through from S corporations, LLCs or partnerships to their respective shareholders, members or partners).  In addition to the increase in capital gains rates referred to above, a reversion to pre-2003 tax rates would mean that the tax on dividends (for non-corporate taxpayers) will jump from a 15% maximum rate in 2012 to a maximum rate of 39.6% in 2013.  With the potential increases in the individual tax rates described above, taxpayers should consider examining whether, based upon their facts and circumstances, they should:

• sell capital gain assets prior to 2013;
• elect not to utilize tax-deferred like-kind exchange provisions for eligible property sold in 2012;
• elect out of installment sales method under Code §453 with respect to installment obligations received in 2012;
• alternatively, dispose of installment obligations payable after 12/31/12(see, I.R.C. §453B); and
• for S corporations with prior C corporation earnings and profits, consider making a distribution or a deemed distribution to zero out the prior C corporation earnings and profits at a preferential 2012 dividend tax rate.