2013 is Coming...Are You ready?
Sep 18, 2012
If you're getting caught up in the 2012 hoopla, it shouldn't be 12/21/2012 that you should be worried about. If the planet as we know it is still around ten days later, 12/31/12 is the tax day of reckoning.
You see, that is the day that the "Bush Era" tax cuts are set to expire and a few other tax provisions are set to begin, unless congress does something about it.
These cuts have been demonized many times. After all, who wants to give those "mean, heartless millionaires" tax breaks, right? Well, you better take a second look at your bank statement, because you're probably one of those millionaires affected by the "Bush Cuts".
What's that? Your bank balance doesn't have at least six digits? Well, do you have children? If so, your "millionaire" status has been getting you a child tax credit of $1000 per qualifying child instead of $500 that will be en force in 2013.
Did you finally sell that stock you got from your grandpa 15 years ago for a nice little profit? Get a little dividend income from your "keeper" stocks? Or maybe you sold your small business to your kids, now that you're finally ready to retire. Well, you captain of industry, you're paying a max of 15% (maybe even 0%) on that capital gain instead of 20%. And, you got away with only paying 15% (or 0%) on those dividends instead of a max of 39.6% starting in 2013. Why? because you're in the "Bush Cuts" millionaire club, of course!
Unfortunately, your rich great uncle passed away and his estate was worth $5M. Good thing he passed away in 2012 and not 2013, because the exclusion in 2013 will only be $1M and his maximum estate tax rate will be 55%. Since he passed away as a "Bush Cuts" millionaire, the exclusion is about $5M and the maximum rate would "only" be 35% instead of the 55%.
As a "Bush Cuts" millionaire, your tax brackets have ranged from 10% to 35%--thus giving your wallet a break and making you richer these past few years. Well, after 2012, the brackets will range from 15% to 39.6%. You can afford it...you're a millionaire, remember?
Here are a few more changes, all taking effect 01/01/13:
***The much discussed Patient Protection and Affordable Care Act (PPACA), or "Obamacare", now dictates that if your Modified AGI exceeds certain amounts ($250K MFJ and SS, $125K MFS and $200K S & HOH), you will have to pay a 3.8% Medicare surtax on the lesser of either: net investment income or the amount of your MAGI exceeding the threshholds.
***The EIC phase-outs will decrease in 2013, (it was up to $50,270 for MFJ with 3 kids in 2012, but the phaseout is projected to be less and only 2 kids will qualify).
***Section 179 expense deduction goes back down to prehistoric $25,000 limit.
***Itemized deductions will be limited once more for those who make over $174K per year
***The employee social security tax will go back to its old 6.2% rate (it is now 4.2%)
***The Medicare rate will increase to 2.35% on any employee earnings exceeding $250K
***Above-the-line student loan interest will now only be allowed as a deduction during the first 60 months of the required repayment period, and it will be phased out at lower income limits ($75K MFJ, $50K others).
***The medical expense deduction on schedule A will now have to exceed 10% of the AGI, instead of the 7.5% threshold previously in effect. We always joke that you’d have to have been pretty sick to get the medical deduction, but now, you’ll have to be deathly sick.
***Non-refundable adoption credit will decrease to $6K, not the $12,650 in effect for 2012 (and prior to 2012 it was refundable!)
***If your employer gives you educational assistance, you will no longer be able to exclude any of it (used to be able to exclude $5250).
***As an heir, estate, or revocable trust, you will no longer be able to take the $250K gain exclusion on the sale of a decedent's principal residence.
***For a complete listing of all the credits that were set to expire, check out the Congresional Research Service's report here:
As you can see, everything seems to point to cashing out now, in 2012. Now is the time to sell those stocks, to pay out larger corporate dividends, to get those medical expenditures, to buy that business machinery, and to have that child, even!!
Some of the credits will probably be renewed because they're just too popular--like the $1000 child tax credit, for example--but others may just be allowed to expire. If you see one that affects you, contact your congressperson. Who knows? maybe thousands of others are calling about the same issue.
Good luck in 2013. All you "millionaires" will definitely need it.
By the way, we have links to the House, Senate & White House in our "helpful links" section, but here are the addresses in case you have an opinion on the topic: