February 5, 2013
The following commentary includes some highlights of the new tax legislation. We are providing this to both our comprehensive wealth management clients, as well as those who use only our investment management services. Wealth management clients: please plan to discuss the specifics of your personal situation with us as soon as feasible.
How 1099 Reporting Will Impact Your 2012 Tax Return Filing – NOTE CAREFULLY
We don’t have the time to go through all the complexity caused by new government regulations imposed on custodians who report investment gains and losses by providing 1099s for your tax filing. Because of this, 1099s most likely will be delayed this year. In addition, even after sending out delayed 1099s, firms are permitted to issue amended 1099s, even after April 15th. I prefer filing my taxes early, but will probably wait until we get closer to April 15th this year. You’ll have to decide what’s best for you. Of course, if an amended 1099 is issued after April 15th, even waiting may not avoid the problem.
Estate Planning Changes
After years
of uncertainty, estate tax exemptions and rates were permanently set. In light of this, it would be wise to review your estate planning in light of these new rules. Just note that “permanent” means there is nothing written into the new regulations that anticipates changes (outside of indexing for inflation in some cases). That doesn’t mean these new rules can’t or won’t be changed in the future. But at least we can plan based upon a fixed set of rules – for the time being.
Income Taxes
Only the “rich” – those single/joint filers whose AGI is $400/$450 thousand or over – will see tax brackets go up. For these “rich,” the highest bracket rises from 35% to 39.6%
Social Security/Self-employed Tax “Hike”
Social security (FICA) and Self-Employed taxes were reduced by two percentage points in 2010 and 2011. The logic was that the additional income you got to keep would cause you to spend more and spark the economy. If that somehow made sense, what the logic was in returning to the original rates (6.2% withholding for employees; 12.4% Self-employment tax) escapes me. But there it is.
Investment Implications
Capital gains and qualified dividend taxes will rise from 15% to 20% only for those in the 39.6% tax bracket (see above). They remain at 0% for those in the 10% and 15% brackets, and at 15% for those in the 25% to 35% brackets. None of this should impact your investment strategy in any significant way. But look at the following category and you’ll see how some of you will pay even more taxes on your investment gains.
Medicare/Obamacare Taxes
A new 0/9% tax is being imposed if your AGI is single/joint $200/$250 thousand. (See below for how this will impact your 2013 tax planning.)
In addition, a 3.8% tax on net investment income is being imposed on the same group. NB: If you plan to sell your house, know that this new tax of 3.8% will be imposed on any gains in excess of your exemption amount.
You have to think that these sorts of taxes may be increased in the future as Medicare costs continue to soar and the true cost of Obamacare becomes more clear.
Alternative Minimum Tax
It was announced that the AMT was finally “tamed” – at least for the “middle class.” A new AMT exemption was set for single/joint filers at AGI $51,900/$80,800 and the exemption will be indexed to the CPI. Those of you filing jointly earning more than $80,800 may have thought that you were “middle class,” but you’ll be happy to know, I’m sure, that you are now considered to be in some category of “upper” income bracket.
Quick Summary
The above are mere snippets of the changes the new regulations impose. To sum up how these will affect most of us immediately:
– All employees will see a reduction of 2% of take home pay on earnings up to $113,700, because of the increase in FICA withholding. (2% of $113,700 = -$2,274.)
– All self-employed individuals will pay 2% more on your company’s net income. (You can do the math for yourself.)
– Single/joint filers over $200,000/$250,000 will pay 0.9% more on every dollar over these limits.
– NB: If you are subject to this 0.9% tax and do not have sufficient withholding during the year, you may be subject to penalties. Employees may want to revisit your W-4 with your employer; self-employed persons may want to increase quarterly estimated payments.
Conclusion:
There’s much more to these new tax rules. While some people will derive a positive benefit in some areas of their tax picture, one thing is certain: your tax situation has become more complex. Surprised?
