The last time the Bush tax cuts were set to expire at the end of
2010, we saw numerous clients scrambling to execute end-of-the-year
transactions designed to "lock in" the expiring tax
rates. Although the tax rate increases did not come to pass,
the cuts are set again to expire on December 31, 2012. This
article revisits techniques allowing private equity funds to lock
in their capital gains before January 1, 2013.
A Snapshot of the Pending Tax Law Changes
If the rate increases take effect, the current 15 percent
federal capital gains rate will rise to 20 percent, and the special
15 percent federal tax rate on dividend income will disappear;
thereafter dividend income will be taxed as ordinary income at
federal tax rates as high as 39.6 percent. Making matters
worse is the special 3.8 percent tax on investment income adopted
as part of the Obama 2012 health care legislation, which takes
effect in 2013 for taxpayers with more than $250,000 of taxable
income.
