Tuesday, October 2, 2012

Tax outlook

In short, shit.

Let's get to the specifics.
So we are heading to this "fiscal cliff" by the beginning of 2013. If you don't know what this term means, the short version is that we might face a sudden increase on tax and reduction on federal spending. It's the tax increase I particularly do not like.

Mind you, none of the following is definite, there are plenty of opportunities for the congress to act, and I think they will, otherwise we'd be facing another recession in 2013.

Federal marginal income tax brackets
10% ($0–$8,700)
15% ($8,701–$35,350)15.0% ($0–$35,500)
25% ($35,351–$85,650)28.0% ($35,501–$86,000)
28% ($85,651–$178,650)31.0% ($86,001–$179,400)
33% ($178,651–$388,350)36.0% ($179,401–$390,050)
35% (over $388,350)39.6% (over $390,050)
Married filing jointly:Married filing jointly:
10% ($0–$17,400)
15% ($17,401–$70,700)15.0% ($0–$59,300)
25% ($70,701–$142,700)28.0% ($59,301–$143,350)
28% ($142,701–$217,450)31.0% ($143,351–$218,450)
33% ($217,451–$388,350)36.0% ($218,451–$390,050)
35% (over $388,350)39.6% (over $390,050)

We see a 3% increase on tax for most people (35k+)

Capital gains
Short-term gains are taxed as ordinary income.Short-term gains will be taxed as ordinary income.
Long-term gains are taxed at 0% if total income
including capital gains puts you in the 10% or
15% brackets; 15% if total income including capital gains puts you in the 25% or higher bracket.
Long-term gains will be taxed at 10% if you're in the 15% bracket; 20% for all other brackets.
Additional Medicare tax on investment income depending on the annual income

This one is pretty bad. LT investment gains are now taxed at 20%. As for the additional Medicare tax, I'll get to it. 

Taxed at ordinary income rate unless held for more than
60 days during the 121-day period that begins 60 days before the ex-dividend date.
All will be subject to ordinary income rates. "Qualifying" dividends will disappear.
Additional Medicare tax on investment income depending on the annual income.

This one is really bad! The disappearance of "Qualifying" dividends are now gone! So corporate earnings are now taxed twice with no special treatment! For those who rely heavily on dividend earning stocks, this is really really bad news. Personally I think it's unfair, too. 

Estate, gift, and generation-skipping taxes
Exemption: $5.12 millionExemption: $1 million
Tax rate: 35%Tax rate: 55%


Medicare taxes
Flat 2.9% tax rate on salary and/or self-employment income.Additional 0.9% tax on salary and/or self-employment income:
Above $200,000, if single.
Above $250,000 (combined), if married filing jointly.
Above $125,000, if married filing separately.
Additional 3.8% tax on net investment income
(including long-term capital gains and dividends)
if adjusted gross income exceeds:
$200,000 (single).
$250,000 (married filing jointly).
$125,000 (married filing separately).

Grrr. Did I mention I hate Medicare tax? I probably didn't. Well now I did. I hate Medicare tax. And now for average American, you gotta lose another 1% income!

So having talked about the all the tax increases, does it mean we should take the LT gains now? Well, I don't suggest so. First of all, we do not know for sure if any of these will actually happen since all the presidential elections and other stuff will take place between now and the beginning of 2013. Secondly, the market might move favorably during this time, and as long as you are trying to avoid a wash sale, you will be prevented from enjoying the returns. As always, one should always set your goal to maximize return rather than minimize tax.

Conclusion? MOAR contribution to your tax-advantaged accounts! These are all shielded from all the tax fluctuations!