A Legal Perspective on Vital Tax Changes in 2013, Protection from Frivolous Lawsuits and Creditors, and Essential Estate and Health Care Documents for You and Your Patients
Florida Society of Critical Care Medicine Symposium
September 2, 2012
1) 2013 Tax Changes: If Congress does nothing, these important changes will come into effect on January 1, 2013 (not even 4 months away):
a. Income Tax Changes:
i. Top ordinary income tax rate from 35% (in 2012) to 39.6% for married couples who file jointly with income over $250,000 and single individuals withincome over $200,000
ii. Long-term capital gains top rate from 15% (in 2012) to 20%
iii. Dividend income taxed as ordinary income (in 2012 most was taxed as long term capital gain, with a top rate of 15%) top rate will be 39.6%
b. Medicare Tax Changes:
i. Extra 0.9% tax on employee’s portion of Medicare tax on salary or on self-employment income if:
1. Combined salary and/or self-employment income above $250,000 for married couples who filed jointly
2. Salary and/or self-employment income above $200,000 for single individuals
*This extra 0.9% in effect makes the top rate 40.5% (39.6% income tax and 0.9% Medicare tax) as opposed to 35% in 2012
ii. Suggestion: Consider S corporations, as some S corporation income may be classified as a dividend (not subject to Medicare tax)
iii. New 3.8% Medicare tax on net investment income (interest, dividends, royalties, annuities, income from passive business activities, rents, long-termcapital gains)
*This extra 3.8% in effect changes the top rates as follows:
-23.8% for long-term capital gains (20% top income tax rate + 3.8% medicare tax), as opposed to 15% in 2012 and
-43.4% on dividends and any other net investment income that is taxed as ordinary income (39.6% + 3.8%).
1. Only applies if modified adjusted gross income exceeds
a. $200,000 for single individual; or
b. $250,000 for married couples who filed jointly.
2. Will apply to the lesser of:
a. net investment income; or
b. amount of modified adjusted gross income in excess of the applicable threshold.
3. Examples:
a. Dr. Davis is a single taxpayer. He has $100,000 of salary and $75,000 on net investment income, and thus a modified adjusted gross income of $175,000. His modified adjusted gross income is less than $200,000 and thus he is not subject to the additional 3.8%.
b. Dr. Jones and spouse file joint income tax returns. The sum of both their salaries is $500,000 but no net investment income. Because they have no net investment income, they will not be subject to the additional 3.8%.
c. Dr. Smith and spouse file joint income tax returns. The sum of both their salaries is $300,000 and they have $25,000 of net investment income for a modified adjusted gross income of $325,000. They will pay the additional 3.8% tax on 25,000.
d. Dr. Werner and spouse file joint income tax returns. The sum of both their salaries is $225,000 and they have $75,000 of net investment income for a modified adjusted gross income of $300,000. They will pay the additional 3.8% tax on $50,000.
4. Suggestions:
a. Sell appreciated long-term capital assets before 2013.
b. Defer deductible expenses to 2013.
c. Invest in tax-exempt bonds and qualified retirement accounts
c. Estate/Gift Tax Changes:
i. Exemption amount from $5.12 million in 2012 to $1 million in 2013.
ii. Estate and gift tax top rates from 35% in 2012 to 55% in 2013
iii. Portability of any unused estate or gift tax exemption of a predeceased spouse to a surviving spouse in effect in 2012 will no longer apply in 2013
iv. Thus, in 2012, up to $10.24 million of taxable transfers (without any estate or gift tax planning) could be exempt from estate and gift tax if proper documentation were to be filed with the IRS. In 2013, only $1 million (without any estate or gift tax planning) of taxable transfers would be exempt from estate and gift tax with the lowest rate being 41% and the highest rate being 55%
v. Suggestions:
1. If you anticipate your assets to exceed $1 million in 2013, consult with an estate-planning attorney to ensure your estate plan will avoid the maximum amount of estate tax
2. Give large gifts before 2013
2) Asset Protection Strategies: Protection from Frivolous Creditors:
a. Invest in assets that are exempt from creditors (ex., Florida homestead, pensions, life insurance policies, 529 plans)
b. Hold property jointly by husband and wife in Florida
i. In general, assets held jointly by husband and wife in Florida are protected from any creditors except for creditors of both the husband and wife
c. Use Florida Limited Partnerships and LLC structures for your investments and practice
i. Very difficult for creditors to get to assets in these structures
ii. Creditors usually can only obtain a court judgment to get to the distributions from these entities. Creditors are thus less likely to pursue lawsuits or litigate when these structures are in place
d. Hold your investments in trusts, corporations, and LLCs formed in other states
i. Many states (ex., Wyoming, Nevada, Alaska, Delaware) have very strong asset protection laws. In addition, many of these states make finding information with regard to these entities very difficult, thus limiting the chance that creditors or their attorneys will be able to locate your assets. Finally, creditors will be less likely to pursue lawsuits or litigate if your assets are located in another state.
3) Essential Estate and Health Care Documents for You and Your Patients: You and your patients may need these documents to give yourselves, not a judge or defaulting law, the power to make decisions with regard to your property, body, children, and health care before, during, and after incapacity or death. In addition, these documents may minimize family conflict when you are not around.
a. Will:
i. Selects:
1. who will administer your estate when you die
2. who will inherit your property
3. who will serve as guardian for your children
ii. Governs how your body will be disposed (ex., burial, cremation, organ donation)
b. Revocable Trust:
i. Avoids probate
ii. Controls how assets are distributed to the beneficiaries over time
1. Directs when a beneficiary may receive property from the trust (ex., upon completion of college or upon turning age 35)
2. Can withhold distributions to beneficiaries (ex., if beneficiary is in debt and the distribution would otherwise go to creditors or if the beneficiary tends to overspend)
iii. Names who will administer property in the trust (the “trustee”)
iv. Fully revocable and amendable
v. Avoid or minimizes involvement of guardianship court over property in the trust
c. Durable Power of Attorney:
i. Names someone to act as your agent over your property
ii. Remains in effect before and during your incapacity
iii. Avoids or minimizes involvement of guardianship court over you and your property
d. Designation of a Health Care Surrogate:
i. Names someone to make health care decisions for you (the “surrogate”) only if you cannot make decisions yourself
ii. The surrogate has a duty to make health care decisions on your behalf (he has to do what you would want, not what he thinks is right)
iii. May ensure that health care decisions, some of which involve life or death and quality of life, are made in accordance with your religious beliefs
iv. May express a wish to donate organs
v. Avoids or minimizes involvement of guardianship court over you
e. Living Will:
i. Directs the providing, withholding, or withdrawal of life-prolonging procedures in the event that you have a terminal condition, end-stage condition, or is in a persistent vegetative state
ii. May address whether food and hydration are to be removed under the aforementioned circumstances
iii. May express a wish to donate organs
iv. Avoids or minimizes involvement of guardianship court over you
f. HIPAA Release/Authorization Documents:
i. Allows someone you trust access to medical records that HIPAA would otherwise prohibit them from accessing
ii. Without access to medical records, the person may not have the necessary information to make health care decisions for you, pay your bills, or otherwise handle your affairs
iii. Revocable
*This document contains legal information, but does not contain legal advice.*This document has examined laws in effect in September 2012.