After reading many tax articles lately in various publications and even just listening to non-tax experts like my next-door neighbor, I’ve found that not only do many people believe that timing the stock market is pinpoint achievable, they also view that extreme gambling with the ever-changing tax code is never risky.
For example, a hot topic in many tax articles these days is gift taxes, relative to the estate tax sunset coming near the end of this year. As of January 1, 2013, the tax laws sunset to 2001 levels if not extended by Congress. This will result in the inheritance tax exclusion dropping back from $5 million per person to $1 million, with the tax rate increasing from 35% to a 55% top bracket.
If allowed to pass through the inheritance process, most IRAs are allowed to convert to an IRA-beneficiary account that doesn’t require all the income tax to be paid immediately as would be required through gifting the IRA to another person (excluding charitable gifts). Therefore, as advisors make sure you know exactly what you are recommending to clients because IRAs are a completely different animal in the gifting-versus-inheritance tax equation.
Hopefully, I’ve shed a little more light on the complexity of the gifting-versus-inheritance tax dilemma. I apologize for not hitting on all areas of concern such as the generation skipping tax.