Congress came together in the hour of need and made the hard decisions necessary to keep the country rolling. Both the House and the Senate voted to approve 157 pages of new tax laws in an attempt to appease worried U.S. citizens and keep us from rolling off the proverbial “fiscal cliff.”
The question is, “What's in all those pages?”
The biggest and most important headlining law passed had to do with income taxes. Our leaders have decided to allow taxes to increase for the top earners in our country from 35 percent to 39.6 percent. If you are single and make $400,000, or married and file jointly making $450,000, your taxes have just gone up. The current tax brackets are frozen in place for everyone else.
The word I see used the most in the media in regards to this tax law change is “permanent.” However, I would not advise anyone to look at anything in our tax code as permanent. All it means is that the taxes won’t go up without a change in legislation; we will need an act of Congress to make it so.
The other big change is that Congress has allowed the tax holiday to expire on the 2 percent haircut on payroll taxes. Starting Jan. 1, your tax rose from 4.2 percent to 6.2 percent. For example, if you make $100,000, you just received a $2,000 tax increase.
The third big decision wasn’t a change at all, but an enactment to maintain the current federal estate tax exemptions at $5 million per person, adjusted for inflation. So a married couple can pass $10 million on to their heirs completely federal estate tax-free, if they file the proper paperwork (Form 706).
Capital gains have changed slightly, but only for top earners. Again, if you make more than $400,000 single payer, or $450,000 joint, your long term capital gains rate has risen to 20 percent, from 15 percent. Everyone else’s stays the same.
Congress also decided to bring back the Qualified Charitable Deduction for people over the age of 70 1/2 who want to donate their required minimum distribution directly to a charity. This will allow you to do so and have the distribution never appear on your tax return.
It is retroactive to 2012 and on through 2013. This means if you gave money to a charity and used your IRA RMD to do so, you can retroactively make the change and save some significant taxes. You still have until the end of January to make the donation from your IRA and have it be applied to your 2012 tax return. Please consult your tax adviser and financial planner to make sure you are filling out the proper forms.
So what does this mean to you, the consumer and saver of America? Not much has changed. You still need to continue to save for retirement and decide if you think these “permanent” tax laws will remain permanent for long. If not, then continue to save for an unknown future with continued possibility of increases to come.
Joe Wirbick is the president of the Lancaster, PA financial services firm Sequinox. Joe specializes in retirement planning and distribution. This allows him to concentrate on developing strategies that help address the unique issues that confront retirees and those approaching retirement.
Tax information is provided for informational purposes only, changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation.. Tax returns should be completed in conjunction with a qualified tax professional. While we are familiar with the tax provisions of the issues presented herein, Sequinox Financial and JWC/JWCA do not offer tax advice and are not affiliated. Mr. Wirbick is an Investment Advisor Representative offering advisory services through J.W. Cole Financial Advisors, Inc.. (JWCA) and securities through J.W. Cole Financial, Inc. (JWC) Member FINRA/SIPC. The opinions expressed are those of Mr. Wirbick and based on information believed to be reliable but not guaranteed and subject to change and do not necessarily reflect the position of JWC/JWCA.JWC/JWCA and Sequinox are unaffiliated independent entities.