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Taxes and Transitions: Navigating a Sea Change of Legislative Reform

January 2014

Joan K. Crain, CFP, CTFA, TEP

Senior Director and Wealth Strategist, BNY Mellon Wealth Management

 

Jeremiah W. Doyle, IV, Esq.

Senior Vice President and Wealth Strategist, BNY Mellon Wealth Management

Table of Contents

Personal Income Taxes: Identifying the Hidden Traps

Tax-Managed Strategies: How to Soften the Blow

Estate Planning: New Options for Wealth Transfer

Gifting Vehicles: Minimizing Taxes in the Transfer of Wealth

Charitable Giving: Assessing the Impact of Taxes and Interest Rates

Taxation as a Global Movement

What the Future Holds

Conclusion: Keys to Success in a World of Change

IN 2013, THE U.S. TAX LANDSCAPE BEGAN A TRANSFORMATION of historic proportion, with the first major tax increase for higher-income earners in more than 20 years. Controversial and sweeping tax changes have been finalized into law, with dramatic implications. The new legislation will shake up the worlds of investing, retirement and estate planning for years to come.

Taxpayers, weary from the Byzantine maneuvering of politicians, are struggling to understand the American Taxpayer Relief Act of 2012 (AT RA) and its impact. It doesn't help that the legislation is fraught with complexity, leaving many taxpayers uncertain about what they will face in the coming years. At the same time, more comprehensive tax reform is still on the table in Washington.

In addition, the 2010 healthcare legislation has aimed a number of tax-related thunderbolts squarely at high-income earners. Some, like the Medicare payroll tax increase, are overt. Others, like the new Medicare surtax on net investment income, are stealth. Consequently, higher-income taxpayers may have no idea how deep their new tax bite really is.

While many tax changes are being implemented, more are yet to come. The legislative horizon is already dotted with contentious suggestions, such as the possible elimination of the mortgage deduction. Even without a crystal ball, it is safe to predict that U.S. tax reform leaders will leave the door open for future disruptions. Not to mention that the automatic spending cuts known as the sequester, if implemented, would put painful budget reductions on the table every year through 2021.

Putting it simply, we are in an era of taxes and transitions. Investors need to pay careful, continual attention to the details of what has changed and what is apt to change. This is particularly true of those going through their own transitions, such as buying a home, developing an estate plan, selling a business or contending with a divorce.

Navigating this ever-shifting tax environment requires new approaches for both planning and investing — and new vigilance to ensure tax-smart decisions in the face of ongoing changes and challenges.

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The information provided in this paper is as of November 2013.
All income and tax figures used in this document are as of 2013 and indexed for inflation when appropriate.

Pursuant to IRS Circular 230, we inform you that any tax information contained in this communication is not intended as tax advice and is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

This material is provided for illustrative/educational purposes only. This material is not intended to constitute legal, tax, investment or financial advice. Effort has been made to ensure that the material presented herein is accurate at the time of publication. However, this material is not intended to be a full and exhaustive explanation of the law in any area or of all of the tax, investment or financial options available. The information discussed herein may not be applicable to or appropriate for every investor and should be used only after consultation with professionals who have reviewed your specific situation.

BNY Mellon Wealth Management conducts business through various operating subsidiaries of The Bank of New York Mellon Corporation.

© 2014 The Bank of New York Mellon Corporation. All rights reserved.

01/2014