Tax Law Changes

Now that the election is over, it’s time to turn to more important matters, namely avoiding being stuck with the bill.

I’m going to start compiling a list of links to the various tax law changes that are currently scheduled to take effect in 2013, both from the potential expiration of the Bush tax cuts and the implementation of the new Obamacare taxes. Comments on tax planning strategies are welcome.

We’ll start with wikipedia:

  • In 2008–2012, the tax rate on qualified dividends and long term capital gains is 0% for those in the 10% and 15% income tax brackets.
  • After 2012, dividends will be taxed at the taxpayer’s ordinary income tax rate, regardless of his or her tax bracket.
  • After 2012, the long-term capital gains tax rate will be 20% (10% for taxpayers in the 15% tax bracket).
  • After 2012, the qualified five-year 18% capital gains rate (8% for taxpayers in the 15% tax bracket) will be reinstated.

Wikipedia – Capital Gains

Marginal rate tables under three scenarios:

Scenario 1: Tax cuts under the extension of the Bush-era tax cuts for all

Rate Single Filers Married Joint Filers Head of Household Filers
10% $0 to $8,950 $0 to $17,900 $0 to $12,750
15% $8,950 to $36,250 $17,900 to $72,500 $12,750 to $48,600
25% $36,250 to $87,850 $72,500 to $146,400 $48,600 to $125,450
28% $87,850 to $183,250 $146,400 to $223,050 $125,450 to $203,150
33% $183,250 to $398,350 $223,050 to $398,350 $203,150 to $398,350
35% $398,350 and up $398,350 and up $398,350 and up

Scenario 2: Tax brackets under the expiration of the Bush-era tax cuts for all

Rate Single Filers Married Joint Filers Head of Household Filers
15% $0 to $36,250 $0 to $60,550 $0 to $48,600
28% $36,250 to $87,850 $60,550 to $146,400 $48,600 to $125,450
31% $87,850 to $183,250 $146,400 to $223,050 $125,450 to $203,150
36% $183,250 to $398,350 $223,050 to $398,350 $203,150 to $398,350
39.60% $398,350 and up $398,350 and up $398,350 and up

Scenario 3: Tax brackets under the expiration of the Bush-era tax cuts for high-income

Rate Single Filers Married Joint Filers Head of Household Filers
10% $0 to $8,950 $0 to $17,900 $0 to $12,750
15% $8,950 to $36,250 $17,900 to $72,500 $12,750 to $48,600
25% $36,250 to $87,850 $72,500 to $146,400 $48,600 to $125,450
28% $87,850 to $183,250 $146,400 to $223,050 $125,450 to $203,150
33% $183,250 to $203,600 $223,050 to $247,000 $203,150 to $227,300
36% $203,600 to $398,350 $247,000 to $398,350 $227,300 to $398,350
39.60% $398,350 and up $398,350 and up $398,350 and up

Forbes Tax Table
Obamacare taxes:

Main individual ones are these:

A 3.8% surtax on “investment income” when your adjusted gross income is more than $200,000 ($250,000 for joint-filers). What is “investment income?” Dividends, interest, rent, capital gains, annuities, house sales, partnerships, etc. Taxes on dividends will rise from 15% to 18.8%–if Congress extends the Bush tax cuts. If Congress does not extend the Bush tax cuts, taxes on dividends will rise from 15% to 43.8%

A 0.9% surtax on Medicare taxes for those making $200,000 or more ($250,000 joint). You already pay Medicare tax of 1.45%, and your employer pays another 1.45% for you (unless you’re self-employed, in which case you pay the whole 2.9% yourself). Next year, your Medicare bill will be 2.35%.

Yahoo Finance

Business Insider

longinvestmentadvisory.com

Anyone know of any I missed?

15 Responses

  1. jnc, as a housekeeping matter, do you mind if I categorize these posts (I’m hoping there is a series!) so that I can find them again later?

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  2. Long term capital gains should be taxed as ordinary income with a generous deduction/exemption for personal real property.

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  3. Only in the context of a flat tax or much lower marginal rates, not at current marginal rates and certainly not if FICA is extended to cover it. Also, there’s no justification for treating personal/real property any differently than any other capital gain. No reason renters should subsidize landowners.

    Okie, my computer crashed while writing up the post. Free to categorize as you see fit. I’m going to be adding to the post.

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  4. “A 3.8% surtax on “investment income”

    i’d have to run the numbers to be certain, that’s going to turn my rental property into a loser.

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  5. The biggest change I see is the treatment of dividends. I see a lot of portfolio re-balancing coming out of that one.

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  6. I suspect the stock market reaction is also people realizing that they had better sell now before the cap gains rates go up on Jan 1

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  7. Yes I did Mark. Thanks.

    And I agree Brent. Taking the capital gain now and then reseting the basis is a valid strategy I would assume.

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  8. The payroll tax holiday and Earned Income Credit expansion will go away at the end of the year. Child tax credit goes back down to $500 too.

    Looking at the tax rate increases is an interesting psychological study for me. The two surtaxes don’t bother me at all because we’re nowhere near $250K joint filers. The 3% increase in our tax bracket is kind of a bummer though.

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  9. And I agree Brent. Taking the capital gain now and then reseting the basis is a valid strategy I would assume.

    I would review the wash sale rules. I think you have to be out for 90 days.

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    • jnc/Brent:

      A brief respite from my self-imposed exile to recommend to you John Allison’s book The Financial Crisis and the Free Market Cure. Allison is the former CEO of BB&T (retired since 2009) and so has plenty of experience with and first hand insights into the financial crisis. I’m currently in the middle of it myself, but wanted to pass it along.

      As an aside, I saw Allison speak at a Cato lunch a few weeks ago. He was very good, and if you ever get a chance to hear him speak, again I highly recommend it.

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  10. “Looking at the tax rate increases is an interesting psychological study for me. The two surtaxes don’t bother me at all because we’re nowhere near $250K joint filers. The 3% increase in our tax bracket is kind of a bummer though.”

    I can relate. But I’m not going to cut my hours as a result.

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  11. Thanks Scott.

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  12. Good to see you, Scott. I was worried about you and Sandy.

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  13. Treat cap gains as ordinary income, indexed to aggregate inflation between the years of buying and selling. Eliminate the corporate tax altogether, which eliminates the double taxation issue. Eliminate the estate tax, BUT tax must be paid on all unrealized gains when transferring property to heirs.

    I suspect those changes in law would be sufficient to drop the rates. Let’s call them 10%, 20%, 30%. Perhaps a lower rate could be set for unrea lized cap gains, since it aggregates gains over many years. Alternately, a flat rate of 20 something percent with a personal/household exemption set to the poverty level. As posted long ago, that simply gives you a continuously variable progressive tax with an asymptotic rate.

    BB

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