What 2013 may bring?

Each year at this time, I begin to focus on year-end strategies to help my clients be the best they can be, financially that is.  As a fee-only financial advisor, I have been preparing and spending additional time strategizing for wrapping up 2012 and moving into 2013. As we face the fiscal cliff, we as a country have many decisions to make. One of those decisions will be the future level of our personal tax rates.

I recently read an article in the Wall Street Journal stating that taxes are going up no matter who is president. Interestingly enough, this is the same message I have been telling my clients.  Taxes are going up…it’s just a matter of how and how much. Will capital gain rates move to 20%? Will AMT get patched again? Will we see an across the board increase in tax rates?

I certainly don’t state my case to incite fear…..well, maybe a little because fear is a great motivator.  I simply state it to make sure you understand the importance of tax planning and decision making during the next two months.  My year-end tax planning appointments will certainly have more complexities and nuances than in most years.

What’s Realistic?

While I am not a prognosticator, here are a few items I feel are realistic for 2013:

Your Two Percent Raise

In 2011, President Obama signed into law a 2% reduction in the OASDI( Social Security) payroll tax. You can read my thoughts on this in an earlier blog post. This reduction remained in place for 2012.  Moving ahead, this reduction is more than likely going to expire.  So, you can expect to pay 2% more in taxes on income up to $113,700 (the social security benefit base) in 2013.

PPACA (Patient Protection and Affordable Care Act – Obama Care) Tax Impact

  • There are many provisions here that I feel will impact our taxable bottom line.
  • Contribution Limits for FSA contributions-PPACA imposes a limit of $2500 for the amount an employee can contribute to a Flex spending account for medical reimbursement.
  • Increased Floor on Medical Deductions for Schedule A- the current tax code allows for a deduction for qualifying medical expenses that exceed 7.5% of adjusted gross income ( AGI).  PPACA increases the floor to 10%.
  • Medicare Surtax for higher income earners- This surtax will be imposes on folks earning 200k (single) and 250K(married filing jointly). The additional tax is .9%.
  • Net Investment income tax. This tax is also imposed on higher earners as well. This tax is levied on investment income over 200/250K , which includes capital gains, interest, dividends, rental income, as well as annuity and royalty income.  Investment income subject to self employment tax is excluded.

Capital Gain Rates

The preferential treatment of capital gain rates are certainly on the chopping block. The consensus seems to point that capital gain rates will rise to 20%.

What to do?

With the above tax changes looming, we must make wise decisions in 2012 to prepare for 2013. There are many methods to plan for 2013, such as accelerating income to 2012, harvesting capital gains in 2012, planning for higher levels of retirement contributions in 2013 to reduce AGI below the 200/250K threshold.

So, as we prepare to end our year, let’s take time to focus on ways to remain as tax efficient as possible. Not knowing what 2013 will bring certainly makes thing a bit more challenging, but my goal is to do the best we can to stay ahead of the curve….allowing us to enjoy the upcoming holidays to the fullest.

 

 

 

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