After packing on the pounds in the holidays it’s time to get back to business of money management advice. With the fiscal cliff hanging over our heads I’ll admit I couldn’t resist checking my phone occasionally for any breaking news during the holiday.
As usual, the whole thing was blown out of proportion by the media and the market is rising again. So what happened, how does it affect you and what should you do about it?
What happened? American Taxpayer Relief Act.
With a name that leads you to believe they lowered taxes, it is actually quite the opposite. Most of the changes were made on individuals making more than $400,000 but there were also some minor changes to Social Security and taxes.
Here is a list of the pertinent points:
For individuals making over $400,000 per year Income tax rates increase from 35% to 39.6%. Under $400K earners not affected.
Long term capital gains and dividend tax rates increase from 15% to 20%.
The phase-out of personal exemptions and limitations on itemized deductions was reinstated for single individuals with adjusted gross income exceeding $250,000 ($300,000 for joint filers);
Corporate tax breaks were extended;
Alternative minimum tax increased to $50,600 (single) and $78,750 (married) with annual inflation adjustments;
For businesses, various credits have been extended, such as research credit, and Work Opportunity Tax Credit;
Payroll tax cuts from 2011-2012 has not been extended and returns to previous rate of 6.2%; This means your employer is required withhold more of your pay check and also have to contribute more.
For estates, gift and generation-skipping transfer tax, the $5 million exemption has been extended permanently and indexed for inflation.
How does it affect you?
As far as investing, it shouldn’t change the stance as short term capital gains rate still sits at 35% while long term rates are 20% (up from 15%). There is a lot of money to be saved by investing in the long term. Obviously, you might want to consult with your accountant for various changes with tax credits or your personal income taxes. You should take into account those changes and plan your spending accordingly for the foreseeable future. Please visit www.irs.gov for the full list of tax changes in 2013.
What should you do about it?
I’d like to highlight the reinstatement of some itemized deductions and exemptions. If you often take advantage of deductions then you should talk with a tax professional. Also, the new tax brackets might affect you so here are the updated 2013 income tax brackets:
Overall, it’s not bad but we would have liked to see more of an effort to reduce spending but perhaps they will tackle that subject in the debt ceiling negotiations coming up in February. The winners here are the middle and lower class as well as the people that didn’t sell their shares fearing a major increase in taxes.
Wishing everyone the best luck for 2013 and another successful year.