Most people in California pay their taxes as they should, but few would say they enjoy paying more than they should. Even those with modest means can take advantage of some tax exemptions such as a childcare credit, or the home mortgage interest deduction.
For those earning more than $250,000 as individuals or $500,000 for married couples, tax planning has become more difficult this year with the passing of Proposition 30 and the looming fiscal cliff in our nation’s capitol. What is a Californian to do?
The tax planning problem is twofold. One part is out of our control and that is Congress. If Congress refuses to act, the so-called Bush tax cuts will expire. This means that the estate tax exemption would go back to $1 million instead of $5 million and the capital gains minimum and cap would also go back to previous levels.
The second part of the problem is that Proposition 30 is retroactive to January 1, 2012. There are now three rates.
- Individuals making $250,000 to $300,000 ($500,000 to $600,000 if married) will be taxed at 10.3 percent instead of 9.3 percent.
- Individuals making $300,000 to $500,000 ($600,000 to $1 million if married) will be taxed at 11.3 percent.
- Individuals making more than $500,000 (more than $1 million if married) will be taxed at 12.3 percent.
Now comes the tricky part. Is it better to sell some assets and take a loss to go down a bracket? Is the capital gain from a home sale better in 2012 or 2103? Will current investments that are doing well make up the difference in the new tax rate for income due to Proposition 30?
These are uncertain times.
For those who are uncertain of the best way to combine tax planning and estate planning, it would be a wise idea to consult with a legal tax professional with experience in these matters.
Source: Business Journal, “On taxes, valley stuck between a cliff and a proposition,” Lauren Hepler, Nov. 27, 2012
