Written by: Keith Frame, CPA

We haven’t talked much about it. We have not yet done much planning in consideration of it. I think most of us CPAs believed it would never come to be (and still don’t in some cases). But the year 2013 is set to usher in a wave of tax increases that will cost all taxpayers dearly.

Not only do the temporary Bush tax cuts disappear, but new taxes appear to fund Obamacare. A brief rundown of changes affecting individual taxpayers is as follows:

  • Tax rates increase across the board with the top marginal rate rising from 35% to 39.6%
  • Capital gains tax rates rise from 15% to 20%
  • Tax rates on dividends increase from 15% to your marginal income tax rate which could be as high as 39.6%
  • Reduction of the child tax credit from $1,000 to $500
  • A new .9% hospital insurance tax on wages in excess of $250,000 for married taxpayers filing a joint return ($200,000 for single taxpayers)
  • A new 3.8% tax on net investment income for married taxpayers with income in excess of $250,000 ($200,000 for single taxpayers). Net investment income includes interest, dividends, capital gains and rental income

 There are several strategies that should be considered as we get closer to the year 2013:

  •  Arrange to receive income in 2012 instead of 2013 if possible
  • Sell profitable investments this year – if  you are considering the sale of an asset with a significant capital gain, selling in 2012 will result in a capital gain rate of no more than 15% plus avoiding the 3.8% tax on investment income
  • Reduce exposure to taxable dividends – it might make sense to include dividend paying stocks in tax-deferred accounts and purchase growth stocks and tax exempt bonds in taxable accounts
  • Distributions from tax-deferred accounts are not included in investment income so this gives taxpayers an additional incentive to maximize retirement plan contributions

Taxes will be THE hot topic during this year’s presidential election. We don’t expect to see much action on these issues prior to the election as the candidates weave and dodge on their real positions.

The effect of these increased taxes on the economy in general, the housing market and the stock market will not be a positive one. The outcome of the election and the last month of this year will dictate planning decisions for many of our clients.