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Our news articles are posted on a regular basis to give our clients relevant and timely information about matters pertaining to our financial services. Browse through our current and archived articles to learn more.

Looming Sunsets Would Affect Almost All Taxpayer

Unless Congress acts, the Bush-era tax breaks—those in the EGTRRA and JGTRRA legislation of 2001 and 2003—will come to an end (i.e., they will sunset) at the end of 2012. Depending on how the November elections play out, the sunsets may be: (1) abolished for everyone, (2) deferred for everyone (as they were in December of 2010, when they originally were to sunset), or (3) deferred for all taxpayers other than those with higher incomes. Still a fourth, albeit unlikely, possibility is that the parties will not be able to agree on remedial legislation and the Bush-era tax breaks actually will sunset at the end of 2012 for everyone.
There are scores of income tax rules that would be altered if the Bush-era tax breaks sunset at the end of 2012, but arguably the most important ones are as follows:

… Tax brackets. The 10% bracket will disappear (lowest bracket will be 15%); the 15% tax bracket for joint filers & qualified surviving spouses will be 167% (rather than 200%) of the 15% tax bracket for individual filers; and the top four tax brackets will rise from 25%, 28%, 33% and 35% to 28%, 31%, 36% and 39.6%.

… Taxation of capital gains and qualified dividends. Currently, most long-term capital gains are taxed at a maximum rate of 15%, and qualified dividend income is taxed at the same rates that apply to long-term capital gains. Under the sunset, most long-term capital gains will be taxed at a maximum rate of 20% (18% for certain assets held more than five years). And dividends paid to individuals will be taxed at the same rates that apply to ordinary income.

If the EGTRRA/JGTRRA sunset rules go into effect at the end of 2012 and dividends and interest are taxed at ordinary income rates up to 39.6% in 2013, it seems highly unlikely that dividends and interest also would be subjected to a 3.8% surtax on net investment income (i.e., Congress would at least repeal the surtax).

Year-end Planning for Investments
Beginning below, and to be continued in future articles in this year-end planning series, are specific steps that taxpayers can take now in order to reduce or avoid exposure to the post-2012 3.8% surtax as well as possibly higher tax rates on capital gains and dividend income.

Accelerate Home Sales
The sale of a residence after 2012 can trigger the 3.8% surtax in one of two ways. It also can expose taxpayers to a higher capital gain tax rate if the sunset rules affect them next year.

•  Under Code Sec. 121, when taxpayers sell their principal residences, they may exclude up to $250,000 in capital gain if single, and $500,000 in capital gain if married. Gain on a post-2012 sale in excess of the excluded amount will increase net investment income for purposes of the 3.8% surtax and net capital gain under the general tax rules. And if taxpayers sell a second home (vacation home, rental property, etc.) after 2012, they pay taxes on the entire capital gain and all of it will be subject to the 3.8% surtax.

•  A home sale may result in a capital gain that increases a taxpayer’s MAGI, because MAGI includes realized capital gains and this component includes non-excluded gain from the sale of a principal residence and all of the gain from a second home. The increase in MAGI may wind up triggering the 3.8% surtax.

A taxpayer expecting to realize a gain on a principal residence substantially in excess of the applicable $250,000/$500,000 limit who is planning to sell either this year or the next should try to complete the sale before 2013. Doing so rather than selling after 2012 will remove the portion of the gain that doesn’t qualify for the Code Sec. 121 exclusion from the reach of the 3.8% tax. It also will reduce the taxpayer’s exposure to possibly higher rates of tax on capital gains under the sunset rules.


A married couple earn a combined salary of $260,000. They plan to sell their principal residence for $1.2 million, and should net a gain of about $700,000, of which $500,000 will be excluded under Code Sec. 121. If they sell this year they will pay a tax of $30,000 (15%) on their $200,000 of taxable residence gain. If they wait till next year to sell, their gain will be fully exposed to the surtax, which in their case equals 3.8% multiplied by the lesser of: (1) $200,000 of net investment income; or (2) $210,000 ($460,000 of MAGI [$260,000 salary + $200,000 of taxable home sale gain] − the $250,000 threshold). Thus, the tax on their gain will be at least $37,600 ([.15 + .038] × $200,000). The tax could be even more if they are subject to a higher capital gains tax next year under the sunset rule (or a modified sunset rule).


A single taxpayer earns a salary of $170,000 and also has $30,000 of investment income (interest and dividends). He plans to sell his vacation home for $500,000 and will net a gain of approximately $400,000. If he sells this year, he’ll pay a $60,000 tax on his gain (.15 × $400,000). If he waits till next year, his MAGI will swell to $600,000 ($170,000 salary + $30,000 investment income + $400,000 gain). He will pay an additional $15,200 of tax on his vacation home gain (3.8% of $400,000), on top of the regular capital gain tax. Additionally, sale of the vacation home in 2013 will expose his $30,000 of investment income to an additional $1,140 of tax (3.8% of $30,000).

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