Talk about money: Taxes – Pay now or pay later?

Is it better to pay taxes now or pay them later?
“Put off paying taxes as long as you can” has been my advice in most cases during my 28 years as a financial consultant.
But that wisdom is being questioned, as President George W. Bush’s tax cuts are set to expire at the end of this year. People are thinking, maybe it’s better to pay taxes now on income or capital gains rather than delay them, because tax rates may be higher in future years.
If Congress doesn’t take action, on Jan. 1, the top rates for federal income tax will rise from 35 percent to 39.6 percent; for dividends from 15 percent to 39.6 percent; and for capital gains from 15 percent to 20 percent.
So, does it make sense to avoid taxes now by putting some of your income into a tax-deferred savings account — like an IRA — if you’re going to end up paying taxes on that income at a higher rate in the future?
“It’s a dilemma,” says Frank Minuti, a certified public accountant with the firm Berger Lewis in Santa Cruz.
Tax-deferred accounts offer the chance to get interest or growth on money you would have paid in taxes, and that’s a plus.
But further complicating the question is the estate tax, which is set to rocket from zero to 55 percent on the value of an estate that exceeds $1 million. Anyone who owns a home in Scotts Valley and has an IRA or other investments could easily have an estate of well over $1 million, and their heirs could be hit with a large tax bill when they die.
“We always recommended that people fund retirement accounts,” Minuti says, “but now you have to look at the size of the estate.”
If someone has accumulated more than $1 million in a deferred savings account and has a total estate of, say, $2 million, when they die, if their heirs are not their spouse, those heirs may have to pay the bulk of that deferred savings account away in taxes, Minuti said
First, there’s 55 percent in estate tax. Then there’s 39.6 percent in federal income tax, because income tax was never paid on money put into a tax-deferred account. And then there’s state income tax.
Converting a traditional IRA to a Roth would spare the heirs the income tax, but they’d still get a hefty estate tax bill.
Then there’s the question of capital gains. If you have highly appreciated stocks or real estate, you might be better off selling now, while capital gains tax rates are still low.
“People think, ‘I could sell this piece of property now or wait three years,’” Minuti said. “Capital gains tax rates may be quite a bit higher. But real estate values are low now and may go up, so that could offset the higher taxes.
“We just don’t know where things are now,” he said. “Everything is case by case. The only blanket statement you can make is that if you are going to make a major financial decision, you need to sit down with an expert and go over it.”
My hope is that Congress will act to clear up this uncertainty before the midterm election in three months. A top priority is to raise the estate tax exemption from the planned $1 million back to $3.5 million, where it was in 2009.
Mark Rosenberg is an investment consultant for Financial West Group in Scotts Valley, a member of FINRA and SIPC. He can be reached at 439-9910 or

mr********@fw*.com











.