How to Prepare When Next Year’s Tax Rates Are Anyone’s Guess
By RON LIEBER/New York Times
Published: December 28, 2012
This was the week we were supposed to get a grand bargain. Instead, we got an undignified stalemate.
So we’re left with no idea how much we’ll be paying in federal income taxes in 2013, and a wide range of possibilities for taxes on investments and estates and tax deductions for mortgage interest and charitable contributions. Plenty of people will spend the next several days feeling helpless, with one eye on the stock market and the other on Washington.
For all the uncertainty, though, we do know a bit about how things will change next year. For example, new taxes, some of which will help pay for Medicare, will affect a few million affluent households.
We also know that in all likelihood, whatever happens in Washington in the coming days or weeks won’t come close to solving the problem that tends to clear the room when you say it aloud: We are not collecting enough money to pay for the promises we’ve made to one another. It isn’t just Medicare, either. Many states have steadfastly refused to set aside the trillions of dollars they will need to cover benefits for public workers once they retire.
As for what you should do about all of this, the answer, for now, is probably nothing. In the short term, stock prices may decline and the economy may get the hiccups, but it’s foolish for amateurs to try to alter their investment portfolios to take advantage of the situation. Leave that to the hedge funds, and watch how many of them get it wrong.
In the long term, however, prepare to make the kind of attitude adjustment that can take awhile to embrace. A decade or two from now, most of us will probably be paying more in taxes or getting fewer services from the government than we do now. Once that happens, you’ll need to earn more, save more, live on less or take better advantage of legal tax avoidance strategies.
In fact, you may want to try to do all of these things in the next couple of years, just to see which ones you can accomplish with the least amount of pain.
Here is what we do know will happen in 2013. First, there is a new tax of 0.9 percent on wages, other compensation and self-employment income above $200,000, if you’re single, or $250,000, if you’re married and filing your taxes jointly. This is on top of the existing Medicare tax.
Second, there is a new tax of 3.8 percent on investment earnings, including interest, dividends and capital gains, in addition to whatever the capital gains tax ends up being. It applies to single people with modified adjusted gross income of $200,000, or $250,000 for married couples filing jointly.
There is still some time to maneuver around the second tax. If you have winning investments you were planning to sell soon anyway, say for a down payment on a house, you might as well do it by Monday. That way, you can avoid the new tax if you’re certain you’ll be in the qualifying income category next year.
To read the entire article from RON LIEBER/New York Times:
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