In 2013, on behalf of your client, you will face the challenges of volatile markets, ramped up regulations, increased need for capital preservation, and a general tendency towards risk aversion. If lawmakers cannot agree on how to address the pending "fiscal cliff," $7 trillion worth of tax increases and spending cuts will begin to go into effect in January. Uncertainty about just what Congress will do will weigh on the economy.
Here's a rundown on some of what could impact your clients if lawmakers fail to act before January 1, 2013.
- Income tax rates: Rise to 15%, 28%, 31%, 36% and 39.6%, up from 10%, 15%, 25%, 28%, 33% and 35%.
- Capital gains rate: Rises to 20% from 15% for most filers.
- Qualified dividend rate: Rises to one's top income tax rate, up from 15% for most filers.
- PEP/Pease limitations: Restored. Households may not be able to take some itemized deductions and personal exemptions in full.
- Child tax credit: Falls to $500 per child from $1,000. The refundable portion also reduced.
- American Opportunity Tax Credit: Expires. The lesser value HOPE tax credit for college tuition is reinstated. Several smaller education tax benefits also expire.
- Marriage penalty relief: Expires. Effectively that means a low- or middle-income two-earner couple will owe more to the IRS than they would if they were single making the same income.
- Estate tax: Parameters revert to pre-2001 levels. The exemption level falls to $1 million from $5.12 million; and the top tax rate on taxable estates rises to 55%, up from 35%.
- AMT patch: Won't be renewed. Income exempt from the Alternative Minimum Tax in 2012 -- for which taxpayers will file returns next year -- falls to $33,750 for individuals and $45,000 for married couples. That's down from $50,600 and $78,750, respectively, if the exemption amounts had been adjusted for inflation. As a result more than 30 million people will be hit by the so-called "wealth" tax, up from 4 million to date.
- Payroll tax holiday: Expires. The Social Security tax rate reverts to 6.2%, up from 4.2%, on the first $110,100 in wages. [Effectively, someone making $50,000 will pay another $1,000 in payroll taxes next year.]
- Medicare surtax: While technically not part of the fiscal cliff, the onset of a new 3.8% Medicare surtax under health reform, should be included to reflect the magnitude of tax increases set to take effect simultaneously in 2013.
Think Alternative Products.
One way to plan is to consider reducing income subject to many of these increases by converting into income not subject to the tax, and making it non-taxable regardless of the amount received.
Exclusions from taxable income include, among others:
- gain on the tax-free exchange of insurance policies;
- the internal ‘build up’ of value inside a life insurance policy;
- tax-free withdrawal/loans from life insurance policies;
- death benefit paid to beneficiary of a life insurance policy;
With Index Universal Life, you can:
- have the reassurance of a death benefit for your loved ones;
- get potential tax-deferred cash value accumulation;
- maximize cash premium payments – within IRS limitations;
- access your cash value through loans or withdrawals; and
- customize your policy with riders and options.
And, because the cash accumulation value of an Index Life policy is not invested in any stocks, bonds, or equity investments, the interest rate credited to the policy’s index account value is linked to the performance of the index or indices chosen and will never be less than zero percent. This gives greater cash accumulation potential than traditional universal life insurance, and the annual floor ensures that the cash value will not decrease due to market volatility.