Benjamin Franklin said, "The only things certain in life are death and taxes." As we head into 2013, it appears he was half right. Death seems pretty certain. But when it comes to taxes, there has never been more uncertainty.
Just like they did in 2011, lawmakers have left addressing the tax "fiscal cliff" until the eleventh hour. If lawmakers don't act, higher taxes and fewer tax breaks are in store for everyone. And even if lawmakers do act, the 2013 tax season will undoubtedly contain the expiration of some of the temporary relief rates that most American's have enjoyed over the past few years.
There are many special provisions currently in place. Here is just a small sampling of the programs that may be on the chopping block.
Bush-Era Tax Cuts
The Bush-era tax cuts are set to expire at the end of 2012. This would affect everyone, regardless of income. For those in the bottom brackets, the lowest rate would rise from 10 percent to 15 percent. Those in the 25 percent, 28 percent and 33 percent brackets would see their marginal tax rates rise 3 percent. Finally, the top tax bracket of 35 percent would resume the pre-Bush-era rate of 39.6 percent.
Capital Gains & Dividends
If no action is taken, long-term capital gains are slated to rise from 15 percent to 20 percent. Even more dramatic would be the increase of qualified dividends from 15 percent to 39 percent. In 2012, a 0.9 percent surcharge was levied on high income Medicare recipients. Starting in 2013, an additional Unearned Income Medicare Surtax of 3.8 percent could be imposed on high income seniors as well.
Reduced Rates and Extended Benefits
Also set to expire are a number of programs aimed to assist in the nation's economic recovery. These programs include extended jobless benefits, as well as reduced Social Security payroll taxes, better known as the payroll tax holiday. These programs will no longer exist in 2013 unless congress steps in.
During the recovery, wealthy Americans could pass on estates of up to $5 million before being taxed. The Estate and Gift Tax is set to return to its previous level of $1 million before incurring estate tax. Amounts above the exemption level will be taxed at a 55 percent rate. This is up from the 35 percent tax rate in place for the past few years.
Education, Dependent Care & AMT
Also at risk of change is the Coverdell Education Savings Accounts. It could see a drop in annual contributions from $2000 to $500 and would no longer be permitted to be used to pay for K-12 expenses. Another educational program with several temporary provisions scheduled to be phased out is the Student Loan Interest Deduction, and the American Opportunity Tax Credit will expire entirely. For those who claim the child tax credit, the amount you claim will decrease from $1000 to $500. The dependent care tax credit will also decrease from $3000 to $2400, and the adoption tax credit will be cut in half from its present $10,000 limit. And finally, the exemption for the Alternative Minimum Tax (AMT) will decrease from $46,700 to $33,750 for single filers and from $70,950 to $45,000 for married couples filing jointly.
2012 Moves for 2013 Uncertainty
There are a number of things you can still do in 2012 to prepare for the uncertainties of 2013. Here are just a few suggestions:
- Consider converting your traditional IRA to a Roth IRA. If congress extends the lower tax rates, you have the option to undo your 2012 conversion up to October 15, 2013.
- Harvest capital gains in 2012 to avoid paying a potentially higher rate in 2013.
- Discuss your estate plan with a professional before year end to see if there are any strategies that can implemented now to avoid a possible increase of estate and personal gift rates.
- In the event that capital gains tax rises, consult a professional about the benefit of holding off on taking any capital losses until 2013.
In 2013 things are going to change. How much or how little the change will affect us is yet to be determined and will probably continue to be fluid right into 2013. Take time to consult a tax professional in order to take advantage of any benefit that you may be entitled to now and moving forward. The only thing certain in life is death and taxes. But when it comes to taxes, you can count on it remaining uncertain exactly how much.
Cindy Diccianni is a certified long term consultant, a registered investment advisor and a registered representative with Leigh Baldwin & Company member FINRA and SIPC. She is thefounder, owner and principal of Diccianni Financial Group, Inc., East Norriton, PA. You can contact her at www.DFGpa.com. Jeanne Lawson is Client Manager with Diccianni Financial Group Inc.