Larry Wagner is a vice president and financial adviser at Rockland Trust. He is responsible for developing fiduciary, investment management and retirement plan business in Rhode Island and southeastern Massachusetts for Rockland Trust Company’s Investment Management Group.
Wagner has 25 years of experience in financial services. He is past president and a current board member of the Providence Society of Financial Analysts, a board member of The Partnership for Philanthropic Planning of Rhode Island, a member of the Estate Planning Council of Rhode Island and of the Rhode Island Financial Planning Association.
He has a bachelor’s degree in economics from Denison University.
PBN: What is the impact of the extension of the Bush-era tax cuts for the majority of Americans that came with the “fiscal cliff” agreement? What about the expiration of the Bush-era tax cuts for high income earners?
WAGNER: Overall, H.R. 8, the “American Taxpayer Relief Act,” prevented an increase in income taxes on the average working American taxpayer. Tax rates for most individuals will stay at 10-to-35 percent, rather than increasing to 15-to- 39.6 percent. The Act also provides relief for many taxpayers subject to the Alternative Minimum Tax (AMT), which causes many middle income taxpayers to pay higher effective tax rates because of mandated modifications to taxable income and deductions. Prior to the Act, AMT exemption limits were $33,750 for unmarried filers, $45,000 for joint filers and $22,500 for married persons filing separately. The Act increases these exemption amounts to $50,600, $78,750 and $39,375, respectively. Additionally, the Act corrects a previous problem of the AMT by indexing these exemption amounts for inflation after 2012. The Act also extends credits for qualified tuition expenses, refundable child credits and various earned income tax credits, which were slated to expire, for another five years. Additionally, the Act extends numerous deductions important to the average American taxpayer, including, but not limited to, certain expenses incurred by teachers, above-the-line deductions for qualified tuition-related expenses, tax-free distributions from retirement plans for charitable purposes and contributions of capital gain property for conservation purposes.
The Act treats high income earners differently than the average American. Joint filers and surviving spouses with an income higher than $450,000 are now subject to a 39.6 percent rate, also applied to single filers earning $400,000 and married taxpayers filing separately with an income of $225,000. These amounts are inflation-adjusted for tax years after 2013.
Joint filers and surviving spouses will encounter Personal Exemption Phaseouts (PEP) starting at $300,000, $275,000 for heads of households, $250,000 for single filer; and $150,000 for married filing separately. Under PEP, the Act reduced total exemptions by two percent for each $2,500 of an individual’s adjusted gross income above the appropriate threshold. The Act also reduces itemized deductions by three percent of the amount by which the taxpayer’s adjusted gross income exceeds the threshold amount, an amount which is also inflation-adjusted. High income earners are also subject to increased taxes on investment income.
PBN: Can you offer insight on the effect of the changes in capital gains and dividend tax rates going into effect in 2013?
WAGNER: Much like the income tax scenario, high income earners will see higher capital gain and dividend taxes in comparison to the average taxpayer. Taxpayers whose ordinary tax rate is below 25 percent will not be subject to taxes on capital gains and dividends earnings. Those who fall into the 25 percent or higher brackets on ordinary income, but whose income thresholds are less than $400,000-$450,000, will continue to be subject to a 15 percent rate on capital gains and dividends.
The top rate for capital gains and dividends will increase to 20 percent for taxpayers with incomes exceeding $400,000 ($450,000 for married taxpayers). However, when these taxpayers account for the new 3.8 percent surtax as a result of health care reform, their effective tax rate on investment incomes will equal 23.8 percent.
PBN: What tax incentives have been retained to encourage business development? Which incentives have expired that may discourage business investment or development?
WAGNER: The Act extended numerous business tax credits and special rules, including many efficient-energy related credits with programs designed to aid financially-challenged areas and those intended to spur employment. An example that Rockland Trust Company participates in is the New Markets Tax Credit Program. The Program helps supply more than $20 billion in private capital to communities with high poverty rates, low income and high unemployment. The Act extended this Program for an additional two years, during which it will provide up to $3.5 billion in financing. Through Rockland Trust’s participation in the program, we have supported numerous commercial and industrial projects throughout Rhode Island and Massachusetts.
Disincentives primarily result from the government’s failure to make the current business-friendly credits, deductions and allowances permanent, which makes long-range planning a significant challenge for businesses of all sizes.
PBN: What are the updates on estate and gift taxes?
WAGNER: The act prevents steep increases in estate, gift and generation-skipping transfer tax rates that would have otherwise occurred. The Act maintains the federal exemption at $5 million for these taxes (indexed for inflation) and increased the top from 35 percent to 40 percent for estates above $5,250,000, gifts and generation-skipping transfers. Importantly, the Act continues a feature that allows a deceased spouse’s unused exclusion to transfer to the estate of his or her surviving spouse.
PBN: What changes in payroll taxes will individuals see? Will the changes in payroll taxes impact businesses?
WAGNER: Unlike the majority of the act’s consequences, the key change in payroll taxes will affect the average taxpayer more than the high income earner. The Act did not extend a two percent reduction on Social Security Tax originally imposed on the individual as a way to stimulate the economy, the result being that average workers will once again see a 6.2 percent social security tax reduction from their take-home pay. Business owners’ rates will remain unchanged, as they never received the two percent reduction that employees did.
Although less take home pay can mean fewer disposable dollars in the hands of consumers, this decision did not face large scale opposition given the funding issues facing our Social Security program.