Through the force, higher taxes you will see.

A galaxy’s worth of nerds rejoiced when news broke that George Lucas sold the Star Wars franchise to Disney in October, 2012. More movies are on the way, and this nerd is excited about them. At the time of the sale, Mr. Lucas said that he always envisioned the Star Wars empire (no pun intended) would live on long after he was gone and that he felt he was leaving the franchise in good hands. What he was probably thinking was, “my CPA and my lawyer told me to do it.”

The Star Wars sale was closed in late-October, 2012, when there was a great deal of uncertainty in the tax world and the “fiscal cliff” was looming on the horizon. What was certain at the time was that the Bush era long term capital gain tax rate of 15% was set to expire at midnight on December 31st. It was widely expected that the tax rate on these gains, especially for individuals in the highest income tax brackets, would be the target of democratic lawmakers in the fiscal cliff negotiations. It was also known that the new Unearned Income Medicare Contribution tax of 3.8% would kick in for gains recognized by high-income taxpayers like Mr. Lucas, in January, 2013.    

So what did Mr. Lucas do? He sold in 2012 for just over $4 billion: $2 billion in cash and 40 million shares of Disney stock (valued at $2,000,800,000 on 10/31/2012). It is impossible to know the exact tax figures without information on Mr. Lucas’ tax basis in the Star Wars franchise at the time of the sale, but we can make some educated guesses. Mr. Lucas probably recognized close to $2 billion in gain in 2012 and he owes the IRS approximately $300 million in long term capital gains tax on receipt of this cash. Mr. Lucas will recognize (and be taxed on) gains on the Disney stock whenever he decides to sell his shares. It has been speculated that Mr. Lucas may donate the shares to charity which could reduce or eliminate the tax bill when the stock is sold.

Had Mr. Lucas waited to sell Star Wars until 2013, the $2 billion he received in cash would have been taxed at the new 20% rate agreed to under the American Taxpayer Relief Act of 2012, adding an additional $100 million to his capital gain tax bill. The 3.8% Medicare Contribution tax would have added another $75 million, bringing his total tax bill to about $475 million.

Whether this sale strategy was outlined by a CPA who was reading the Congressional tea leaves or Mr. Lucas turned to a more trusted source for his tax planning (“Through the force, the future – and rising taxes – you will see…”), the result is the same: Mr. Lucas probably saved close to $175 million in taxes by selling when he did. The gains from the sale will be going to educational charities, who will put the extra $175 million to good use. You can read more about Mr. Lucas’ charitable plans here:

http://www.hollywoodreporter.com/news/disney-deal-george-lucas-will-384947

The sale of the Star Wars franchise presents a good opportunity to analyze some of the effects that the American Taxpayer Relief Act of 2012 has on a high-income earning taxpayers. We will be discussing these recent changes to the income and estate tax calculations at a seminar in our office on March 7, 2013, at 7:30 am. A light breakfast will be served. If you would like to attend this complementary seminar, please RSVP to events@samuelslaw.com or 503-226-2966. May the force be with you.

Tax Snowball or Abominable Avalanche? 10 Likely Changes to the Tax Code

In a few short months, after the Dog Days of summer have gone and the sweltering humidity of the Washington D.C. begins to subside, Congress will begin to get serious about finishing work on tax legislation that will make substantial changes to our current tax code. I’ll leave to the politicians to discuss the wisdom, or lack thereof, of these changes. However, one thing is certain – tax changes are on the way!

I have no crystal ball. However, as Congress debates health care legislation and begins to embrace the red ink from the fiscal stimulus legislation in the last year, significant changes to the Tax Code are as certain as January snow in Denver. For those whose time has come to pay their “fair share” of taxes, here are the ten changes that we’re most likely to see when the sun rises on New Year’s Day 2010:

1. Tax Rates. The “Greenbook” report released by the Obama Administration in May states that the current 33% and 35% tax rates will increase to 36% and 39.6%, respectively. These rates would affect those individuals with incomes exceeding $200,000 for single persons and $250,000 for married couples. While Congress still needs to make the final decision, the proponents of these increases tend to argue that these “reforms” merely represent a return to the Tax Code of the Clinton Administration.

2. Capital Gains. Currently, the maximum tax rate on recognized capital gains is 15%. Under current law, these changes expire after 2010, with the maximum rate scheduled to increase to 20%.  For the same group of high earners (singles making more than $200,000 and married couples making over $250,000), the 20% bracket would return early, most likely with the 2010 tax year.

3. Qualified Dividends. Certain “qualified” dividends received by individual taxpayers from corporations are currently taxed at a 15% maximum rate. Like the capital gains tax increase referenced above, the maximum tax on these “Q Dividends” would be increased to 20% as well. Interestingly, the Obama Administration did not advocate a return to the Clinton years when dividends were taxed in the same manner as ordinary income. My bottom line on this one – don’t count on it. An increasingly budget-conscience Congress will see it as “low hanging fruit.”  Look for the return of ordinary income tax rates on dividends.

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