Best of the Week
Most Popular
1.The Brexit War! EU Fearing Collapse Set to Stoke Scottish Independence Proxy War - Nadeem_Walayat
2.London Terror Attack Red Herring, Real Issue is Age of Reason vs Religion - Nadeem_Walayat
3.The BrExit War, Game Theory Strategy for What UK Should Do to Win - Nadeem_Walayat
4.Goldman Sachs Backing A Copper Boom In 2017 - OilPrice_Com
5.Trump to Fire 50 US Cruise Missiles To Erase Syrian Chemical Attack Air Base, China Next? - Nadeem_Walayat
6.US Stock Market Consolidation Time - Rambus_Chartology
7.Stock Market Investors Stupid is as Stupid Goes - James_Quinn
8.Gold in Fed Interest Rate Hike Cycles- Zeal_LLC
9.The BrExit War - Britain Intelligence Super Power Covert War With the EU - Nadeem_Walayat
10.Marc Faber: Euro to Strengthen, Dollar to Weaken, Gold and Emerging Markets to Outperform - MoneyMetals
Last 7 days
Earth Overshoot Day - Human Population Growth - 28th Apr 17
Misunderstanding GDXJ: Why It’s Actually Great News For Junior Miners - 28th Apr 17
What Makes Bitcoin Casinos So Remarkable? - 28th Apr 17
Financial Markets Improvised Explosives - 27th Apr 17
More Stock Market Short-Term Uncertainty As Stocks Get Close To Record High - 27th Apr 17
Elliott Wave Theory: Is Elliott’s Theory Enough? - 27th Apr 17
Billionaire Investor Paul Tudor Jones Says Stock Market Valuation Is “Terrifying” And He Is Right - 26th Apr 17
The Great BrExit Divides - Britain, USA and France - 26th Apr 17
10 Facts That Show Our Taxes Are Worse Than You Thought - 26th Apr 17
What Trump’s Next 100 Days Will Look Like - 26th Apr 17
G20: SURPASSING THE 2nd GLOBAL STEEL CRISIS - 26th Apr 17
What A War With North Korea Would Look Like - 25th Apr 17
Pensions Are On The Way Out But Retirement Funds Are Not Working Either - 25th Apr 17
Frank Holmes : Gold Could Hit $1,500 in 2017 Amid Imbalances & Weak Supply - 25th Apr 17
3 Reasons Why “Spring Forward, Fall Back” Also Applies To Gold - 25th Apr 17
SPX may be Aiming at the Cycle Top Resistance - 25th Apr 17
Walmart Stock Extending Higher - Elliott Wave Trend Forecast - 25th Apr 17
Google Panics and KILLS YouTube to Appease Mainstream Media and Corporate Advertisers - 25th Apr 17
Gold Price Is 1% Shy of Ripping Higher - 25th Apr 17
Exchange-Traded Funds Make Decisions Easy - 25th Apr 17
Trump Is Among The Institutionally Weakest National Leaders In The World - 25th Apr 17
3 Maps That Explain the Geopolitics of Nuclear Weapons - 25th Apr 17
Risk on Stock Market French Election Euphoria - 24th Apr 17
Fear Campaign Against Americans Continues Nuclear Attack Drills in New York City - 24th Apr 17
Is the Stock Market Bounce Over? - 24th Apr 17
This Could Be One Of the Biggest Winners Of The Electric Car Boom - 24th Apr 17
Le Pen Shifts Political Landscape- The Rise of New French Gaullism  - 24th Apr 17
IMF Says Austerity Is Over - Surplus or Stimulus - 24th Apr 17
EURUSD at a Critical Point in Wave Structure - 23rd Apr 17
Stock Market Grand Super Cycle Overview While SPX Correction Continues - 23rd Apr 17
Robert Prechter Talks About Elliott Waves and His New Book - 23rd Apr 17
Le Pen, Melenchon French Election Stock, Bond and Euro Markets Crash - 22nd Apr 17
Why You Are Not An Investor - 22nd Apr 17
Gold Price Upleg Momentum Building - 22nd Apr 17
Why Now Gold and Silver Precious Metals? - 22nd Apr 17
4 Maps That Signal Central Asia Is at Risk of War - 22nd Apr 17
5 Key Steps For A Comfortable Retirement From Former Wall Street Trader - 22nd Apr 17
Can Marine Le Pen Win? French Presidential Election Forecast 2017 - 21st Apr 17
Why Stock Market Investors May Soon Be In For A Rude Awakening - 21st Apr 17
Median US Household’s Wealth Has Declined by 40% Since 2007 - 21st Apr 17
Silver, Platinum and Palladium as Investments – Research Shows Diversification Benefit - 21st Apr 17
U.S. Stock Market and Gold, Post Tomahawks and MOAB - 21st Apr 17
An In Depth Look at the Precious Metals Complex - 20th Apr 17
The Real Story of China’s Strong First-Quarter Growth - 20th Apr 17
3 Types Of Life-Changing Crisis That Make You Wish You Had Some Gold - 20th Apr 17
The Truth is a Dangerous Thing - 20th Apr 17
2 Choke Points That Threaten Oil Trade Between Persian Gulf And East Asia - 20th Apr 17

Market Oracle FREE Newsletter

Why 95% of Traders Fail

Taxmageddon 2013: How to Prepare for Looming Tax Law Changes

Personal_Finance / Taxes Sep 07, 2012 - 06:40 AM GMT

By: Money_Morning

Personal_Finance

Best Financial Markets Analysis ArticleLarry D. Spears writes: It's often said the only things certain in life are death and taxes - but this year, even taxes aren't a certainty.

At least not the specifics, thanks to Election 2012 and Taxmageddon 2013. Investors are left with more questions than answers.


Will the so-called Bush tax cuts expire as scheduled - or be extended? Will levies designed to help implement and pay for Obamacare go into effect - or will Republicans finally succeed in repealing the new healthcare program?

Will President Barack Obama view his re-election as a mandate to impose more new taxes to expand social programs, or will a newly-elected President Mitt Romney cut taxes in a bid to encourage renewed economic growth?

That's why it's important for investors to look at the range of possibilities relative to their current financial holdings and take precautionary actions where appropriate.

This special Money Morning series will examine a number of upcoming or proposed changes in tax laws and rates and suggest strategies to minimize their impact on your investments. Or better yet, take advantage of them if possible.

With Taxmageddon, Rates are Set to Rise
As it stands, there are more than two dozen tax-law changes scheduled to take effect in 2013. Some of them target nearly every single taxpayer while others are more narrowly focused on individuals, such as small business stockholders and home sellers.

Of most immediate concern to investors is the scheduled increase in tax rates on capital gains. Currently, the federal government recognizes three types of capital gains:

•Short-term gains - Profits from assets held for less than one full year. These gains are taxed as ordinary income at a rate based on your total personal income, with percentages now ranging from 10% to 35%.
•Ordinary long-term gains - Profits from assets held for more than one year, now taxed at a maximum rate of 15%, regardless of income from other sources. (Note: Individual taxpayers in the 10% and 15% brackets now pay no tax on long-term capital gains but merely include them with other taxable income. However, in 2013 these taxpayers will be subject to a 10% tax on long-term gains.)
•Qualified long-term gains - Profits from assets purchased after the 2000 tax year and held for a minimum of five years. Qualified gains are currently taxed at a maximum 15% rate.

This relatively simple structure will become more complicated in 2013, for several reasons... For starters, there is no scheduled increase in tax rates for short-term capital gains - they'll still be taxed at ordinary income rates. However, if Congress allows the Bush-era tax cuts to expire, those ordinary rates will rise substantially.

For example, those in the lowest income-tax bracket - individuals earning less than $8,700 or married couples earning less than $17,400 - will see their tax rate jump from 10% to 15%, with the increase applying to short-term gains as well. (Note: The income levels cited for various tax brackets are for 2012; they'll be adjusted for inflation in 2013.)

Taxpayers in the next bracket - individuals earning from $8,700 to $35,350 and couples earning from $17,400 to $70,700 - will see no increase in their current 15% marginal tax rate. But there is one catch! Rather than being double that for unmarried taxpayers, the income level at the top of the bracket for married couples will be reduced to 167% of the individual cap - just $59,035 based on 2012 numbers.

This will put substantially more joint tax filers in the new 28% bracket (now 25%), increasing the so-called "marriage penalty" and effectively almost doubling their rate on short-term capital gains as well.

Taxpayers in the current 25%, 28% and 33% brackets will see their marginal tax rates jump by 3% in 2013, while those in the highest bracket - individuals and couples earning more than $388,350 - will see a 4.6% increase from 35% to 39.6%.

Individuals in the highest brackets could also see an additional 3.8% bump in their capital gains rates if Obamacare - formally, the Patient Protection and Affordable Care Act (PPACA) - is not repealed and the included "Medicare contribution tax" is assessed on unearned income.

How to Minimize the Taxman's Bite
Given those changes, the best strategy if you have short-term gains and want to take them for other-than-tax reasons - e.g., technical resistance or fading fundamentals on a stock - is to take them before the end of the year, when your ordinary income rates will still be lower.

On the other hand, if you're in a higher bracket, currently have short-term gains and have no other reason to sell, don't. You'll be better off to hold into 2013, let the gains go long-term and then sell, paying the 20% maximum that will be imposed then.

The optimum strategy if you already have long-term gains is the exact opposite.

As noted, the current rate on both ordinary and qualified long-term gains is 15%. However, beginning Jan. 1, 2013, that rate will climb to 20% for ordinary long-term gains and 18% for qualified (or five-year) gains. (Note: Individual taxpayers in the 10% and 15% brackets now pay no tax on long-term capital gains but merely include them with other taxable income. However, in 2013 these taxpayers will be subject to a 10% tax on long-term gains.)

Plus, if you're in one of the upper income brackets, your gains will also be subject to the 3.8% Medicare contribution tax, which would raise your 2013 rates on ordinary and qualified long-term gains to 23.8% and 21.8%, respectively.

Given that, all investors holding positions with long-term gains, qualified or not, should keep a close eye on both the election results and the actions of Congress in the wake of the vote. If mid-December rolls around and lawmakers haven't taken action to either extend the Bush tax rates or repeal the Obamacare tax, your best strategy will be to sell your appreciated assets before year-end so you'll only owe 2012's lower 15% capital gains rate.

(Note: This strategy is doubly important for investors in states with capital-gains or income-tax rates assessed as a percentage of federal rates.)

If you still like the long-term prospects for your stock or other security, you can simply wait until after Jan. 31, 2013 and buy it back, starting a new holding period - and perhaps getting a better price if other investors are also selling their shares. (Technically, you only have to wait more than 30 days before rebuying to avoid the so-called "wash sale" rule, but why squeeze the deadline and tempt the IRS.)

One other strategy note: If you have losing long-term securities positions, you may also want to sell those holdings before the end of the year. You can use the losses to offset gains on the profits you take this year, plus you can carry any excess losses forward and apply them against gains you may have in 2013. Given the higher rates then, that will increase the tax value of your current capital losses.

In the next installment of our tax series, we'll discuss changes in the 2013 rules and rates for dividends on stocks and exchange-traded fund (ETF) - an area of major concern for income-oriented investors.

Source :http://moneymorning.com/2012/09/07/taxmageddon-2013-how-to-prepare-for-looming-tax-law-changes/

Money Morning/The Money Map Report

©2012 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife