Sacramento residents may want to prepare themselves for a tax hike next year. According to Republicans, in 2013 we will see the largest tax increase in U.S. history. From a pure dollars and cents perspective this is true, but when measured as a percentage of gross domestic product and compared to other years, it quickly loses this label. The increases would represent roughly 2.6 percent of GDP.
The political rhetoric surrounding the potential expiration of tax cuts and credits in 2013 seems to have reached critical mass, but all hyperbole aside, the effects of letting these tax cuts expire could present a number of estate planning challenges. These could include how much a person can give away free from taxation and whether children could inherit a family business unimpeded by taxes.
All in all, the tax increases that could take place in 2013–barring political action–will increase federal government revenues by 16 percent, to the tune of $423 billion. If these changes occur, Sacramento families may have to adjust their spending patterns in order to save and invest money in their estates. For example, failing to extend the payroll tax cut next year will cost the typical family an additional $1,000 per year. In addition, other tax increases could make protecting individual assets and wealth more difficult.
This realization will not be easy for California families. However, it does underscore the need for people to have a solid estate plan to minimize tax consequences. Estate planning is generally not something that inspires a sense of urgency among most people, but with looming increases in estate taxes, income taxes and investment taxes, there may be no more important time than now to address one’s estate plan.
Source: The Sacramento Bee, “Fact Check: Looming tax hike not the biggest ever,” Stephen Ohlemacher, June 11, 2012.