While we prefer to look at client tax situations before the snow falls, in 2012, like many recent years, it may pay to wait until early December to make significant tax moves. But it still makes sense now to be aware of the likely changes and take steps to limit what you’ll owe in April.
Supreme Court Chief Justice John Roberts surprised most of us last month with his majority opinion keeping much of the Affordable Care Act in place. Along with mandatory health coverage and insurance exchanges, the act imposes a 3.8 percent Medicare surtax on unearned income for married filers with taxable income above $250,000 starting next year.
Also making news was the Senate’s 51-48 vote last week on President Barack Obama’s plan to keep current tax cuts in force for families earning $250,000 or less beyond 2012. A Republican alternative was defeated that would continue the tax cuts for all, but would drop credits for low income workers. Neither measure is given much chance of being enacted.
Our current tax structure has been around since 2003, so we’ve grown accustomed to our historically low rates that are scheduled to end this year. Everyone from low earners in the 10-percent bracket (up to $17,400 of taxable income if married) to the highest earners in the 35-percent bracket (above $388,350 for single and married earners) would see their taxes increase in 2013.
Long-term capital gains tax rates would increase to 20 percent for many from the current 15 percent. Dividend tax rates would dramatically spike from 15 percent for most filers and become taxed as ordinary income. Hidden tax increases would take effect such as the resumption of personal exemption and itemized deduction phase-outs. Estate and gift taxes would increase as well.
Many political experts predict taxes largely will be ignored in Washington until a lame duck session after the election. Then Congress is predicted to extend the current tax rates through next year, including a continuation of the payroll tax cut and the perennial AMT fix. The rationale is that our economy is too weak for lawmakers to risk our slow recovery through a tax increase. But the Medicare surtax will stand. While this would mean most of us would see no change for next year, if you are a high earner, strongly consider tax planning moves once the outcome of the political endgame becomes clearer.
If you’re thinking of selling an investment with a big gain, doing it this year would avoid the Medicare surtax. This year’s $5.12 million limit for tax-free lifetime gifts and bequests may not be continued. If you have a large estate, it may be a good time to revisit your estate plan with your tax advisor and attorney.
If tax rates do increase for next year across the board, there are whole set of strategies to keep more money in your wallet. Stay tuned until after the election for details.
The Laid Back portfolio, a no-nonsense, simple way to invest, had a setback as did most of the market last quarter.
The S&P 500 lost 2.75 percent last quarter including dividends. At certain points it dipped much lower than this and was partially saved by a more than 2 percent positive move on the quarter’s last day. The Barclays Aggregate Bond Index was up 2.06 percent as bonds continued their multi-year rally.
Including 1 percent annual fees, that leaves the Laid Back Portfolio down 1.21 percent for the quarter — but up 6.13 percent for the year.