From the Desk of Tom Licciardello, CFP
Is it possible that our congressional leaders will allow us to fall off the fiscal cliff?
Let’s hope calmer minds prevail and a compromise is reached. If not, what are some of the possible tax implications we face?
The current Federal Income Tax rates are set to expire at the end of 2012. Starting January 1, 2013 several tax changes take effect including:
- The top marginal income tax bracket will move to 39.6%, up from 35%.
- The long-term capital gain rate will move to 20%, up from 15%.
- Dividends would no longer have any preferential tax treatment which currently exists for “qualifying dividends”
- Two new taxes will come into play as a result of The Patient Protection and Affordable Care Act (PPACA):
1. The Medicare tax rate on households with earned income over $250k will be increased from 1.45% to 2.35%. The same increase will occur for singles with earned income over $200k.
2. A new Medicare tax will be introduced for the same group on investment income at a rate of 3.8%. The Surtax applies to: taxable interest, dividends, capital gains, passive activity income, rents, royalties, and annuities.
· The reduction to the social security tax rate is restored to 6.2%, currently at 4.2%.
- The currently favorable estate & gift tax laws expire at the end of 2012. The estate and gift tax exemption moves down to $1M with a 55% maximum tax rate. Currently there is a $5M exemption and a 45% maximum tax rate.
So, what should you be considering? Here’s one thought. Perhaps this is the year to do some Tax Gain harvesting! If there are substantial long term capital gains within your non-qualified portfolio, capturing the gain under the current favorable 15% long term gain tax rules may be wise.
Not sure? For those portfolios that we manage, give a call and we can provide some guidance.