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
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.
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
- 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.
By Troy Von Haefen, CFP®