Our illustrious leaders pulled together a “Hail Mary” law in the wee hours over the holiday weekend that saves us from going over the “fiscal cliff”—at least for now. The act, which Congress passed on New Year’s Day, addresses some of the year-end tax hikes Americans have been expecting for the last several months. However, the debt ceiling and sequestration issues have not yet been resolved. The headline-making across-the-board cuts were only delayed for two months. Therefore, our leaders will be wrangling over these issues in the near future, promising more fun to come.
In the coming weeks, we will delve into the specifics of the “American Taxpayer Relief Act,” and provide some planning strategies that should help fully utilize the new law to your benefit. For now, let’s discuss some of the basics coming out of the new law.
Permanent Alternative Minimum Tax (AMT) Patch: Those who have dealt with alternative minimum tax understand how frustrating it can be. AMT has been “patched” several times over the years, temporarily increasing exemption amounts to account for the growing number of taxpayers subject to this tax. The previous patch from the 2010 Tax Relief Act expired at the end of 2011. The new law permanently sets the exemption at $50,600 for individuals and $78,750 for married couples filing a joint return. These exemption amounts are retroactively effective for the 2012 tax year. In addition, AMT now has an annual indexing feature for inflation. This is a good thing.
Roth Conversions for Retirement Plans: The details on this are limited at this time, but it appears you will be allowed to convert your pre-tax 401(k) savings to a Roth 401(k), which can be tapped tax-free in retirement. This might be a good thing if you assume tax rates will continue to rise in future years. In Congress’ eyes, conversions should raise revenue because the act of converting is considered a taxable event. Congress is hoping that the long-term tax benefits of Roth-style plans will encourage workers to pay taxes on their retirement savings today.
Capital Gains and Dividend Taxes: If you are below the 25% tax bracket, capital gains and dividends will be taxed at zero percent. Investors whose tax brackets are above 25% and below 39.6% will pay the same rate of 15% for capital gains and qualified dividends. Those in the 39.6% bracket—generally, taxpayers with incomes exceeding $400,000 for individuals and $450,000 for married filing jointly—will pay 20% on dividends and capital gains. It is important to note that this does not account for the 3.8% Medicare “surtax” on investment income for high income earners. Some higher-income taxpayers may pay as much as 23.8% in taxes on investment income, depending on their tax bracket.
This is not a perfect law, but it does take a lot of the guesswork out of planning in 2013 and beyond.
At Henssler Financial we believe you should Live Ready, which includes understanding how new laws affect your financial plan. If you have questions regarding your family’s financial plan, the experts at Henssler Financial will be glad to help. You may call us at 770-429-9166 or email at experts@henssler.com.
The following information is reprinted with permission from Forefield, a division of Broadridge Financial Solutions, Inc. This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
