As of January 1, 2013, the Bush era tax cuts will expire and whether we go over the fiscal cliff or not, there are issues of concern to all investors, including retirees.
The 15% tax rate on dividends will expire and recipients will pay tax on those dividends at their marginal tax rate up to 39.6% for the wealthiest among us. Most of you will not reach that top tax bracket, but you face higher taxes on your dividends than at any time in the past 10 years.
The Alternative Minimum Tax (AMT) still has not been “fixed” and is a concern to all taxpayers with investment income.
Individuals earning more than $200,000 or couples earning more than $250,000 will be subject to a medicare surcharge of 3.8% on their investment income with few exceptions. Some taxpayers will be subject to a lower rate. Investment income is broadly defined to include dividends, interest, and capital gains.
Capital gains will be taxed at 20% instead of 15% for most taxpayers.
It is important to recognize these changes are critically important to each of you on a micro level because you will pay more taxes. If you have highly appreciated stocks or other property that can be sold before the end of the year, and you were already considering selling the assets next year, you should consider accelerating your plans and make the sale this year to take advantage of the lower rates. A capital gain harvested this year will be taxed at only 63% of the rate next year for high income taxpayers. A capital gain of $100,000 will incur federal and state tax this year of $20,000, but if sold after the first of the year, the tax will be $28,800.
If it sounds like this change may affect you, consult your tax advisor and your financial advisor before deciding what to do.
Do not rely on this post for your tax advice, this is just a shout out to get the full explanation addressed to your specific situation from someone you trust to advise you about taxes.
Remember although this is a serious concern to you personally, it is probably a good thing for the long range health of the economy. Next week, I will depart from my strict policy of staying away from predicting the future direction of the economy and describe why these are necessary changes to the future of a stable economy.
I remain anxious to help you make sure your estate plan is current and meets your intentions. I can also help with designing gifting and tax advantaged charitable gifting plans. If interested in discussing such issues, call me.