2013 tax changes

Here’s a short list of what to expect if the current tax cuts expire in 2013 and no additional changes are made:

  • Nobody’s taxes will decrease without additional management
  • The 10% bracket merges into the 15% bracket
  • For Married Filing Jointly, the 15% bracket narrows to 166% of the single rate (was 200%)
  • Subsequent brackets raise to 28%, 31% 36%, and 39.6%
  • The child tax credit decreases to $500 and is only refundable with three or more kids
  • Estate tax exception goes from $5.12M to $1.00M, wiping out many legacies
  • Qualified dividends return to being taxes as ordinary income

Without adjusting your exemptions (if you can), more will be taken from each paycheck.  Add to this the inevitable return of Social Security collection returning to 6.2%, and whatever work that was done to get ahead in 2012, may well be wiped out in 2013.

There are a couple for ways to counter this:

  • Accelerate legitimate business losses in 2013
  • Defer losses in 2012 to 2013
  • Contribute more to your 401K, traditional IRA, etc.
  • Take stock losses in 2013, and reconvert to a closely related asset after 30 days (avoids the wash sale rule)
  • Increase charitable giving
  • Take less pay if you own your business and reinvest earnings…again trying to accelerate losses as much as possible
  • Take time off instead of a bonus.  At a higher tax rate, that bonus becomes worth less than in 2012.
  • If eligible, pull higher distributions from a Roth account as opposed to a traditional IRA account

Of course, this whole situation may get fixed in the next couple of days.  In that case, the above will serve as an exercise in academics.  If we come into 2013 with higher tax rates, the above will prove to be of high value.

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