By Jack N., Communications Analyst and Blog Contributor
As a tax junkie, I sort of enjoyed the back and forth between the two branches of government over the fiscal cliff. In the end, the two sides came to a 13th-hour agreement on permanent tax code changes that begs the question: What was all the fuss about? There were very few substantive changes for the vast majority of people – with one major exception. Here’s a rundown:
Capital gains: Harvesting Becomes More Important
The deal made early this month preserved the two existing rates at 0 percent and 15 percent (depending on your income bracket), except for individuals with an adjusted gross income of $400,000 and joint filers above $450,000, where the rate rises to 20 percent. For higher-income earners, the bigger rate puts a premium on tax-loss harvesting. In other words, if possible, you should consider offsetting gains with losses to minimize your tax bill.
Dividends: A Small Hike for a Few
The deal matches the same tax rates for dividends as those for capital gains, again largely keeping in place current rates except for high-income households. Looking at it practically, let’s assume that you hold $10,000 worth of XYZ Electric Co. stock, which pays a dividend yielding 4 percent today. In 2012, you would have received $400 in dividends and paid $60 in taxes. In 2013, you’ll pay $80. You’ll have to decide if that will alter your investing plans for dividend-paying securities.
Income Tax Rates: No Worries for Most
Income tax rates are staying the same for the vast majority of Americans (again, except for the higher-income levels described above). So by definition, there’s no change, but here comes the major exception. Keep on reading to find out.
Payroll tax: The Major Exception
The payroll tax includes the deduction for Social Security. For the last two years, it was reduced from 6.2 percent to 4.2 percent, and Congress and the president allowed it to head back up to 6.2 percent on the first $113,700 in wages. For example, if you make $50,000 annually, you’ll pay an additional $1,000 per year. You may want to consider adjusting your financial plan or budget by reducing spending, cutting investment contributions or both.
Tax Deductions; A Haircut for Upper Earners
The fiscal cliff bill reinstated a Clinton-era provision called the Pease Amendment, which places a formulaic cap on itemized deductions for individual taxpayers making $250,000 and $300,000 for joint filers. In addition, personal exemption deductions will be reduced for the same group of high-income earners. The net result, like the increase in tax rates, is a likely increase in federal taxes for higher-income households.
Add it all up, and here’s what you get: Virtually every American with earned income will see a higher tax bill next year. (Additionally, there will be a 3.8 percent surcharge tax on investment income for individuals making at least $200,000 and couples filing jointly making at least $250,000. But that’s part of the 2010 health care legislation, not the fiscal cliff deal.) That’s the bad news. The good news is that the tax implications of trading and investing remain largely untouched for all but high-income earners. I encourage anyone who wants to learn more about the tax implications of the fiscal cliff negotiations to consult a tax expert, or dive into the details if you’re comfortable.
How will you respond to the fiscal cliff tax changes?
Also of Interest:
Jack N. is a communications analyst at Scottrade. He works to demystify the markets and the economy for all types of investors and traders.
Scottrade does not provide tax advice. The information shown is for informational purposes only. Please consult your tax or legal advisor for questions concerning your personal tax situation.
Articles, commentary, and opinions expressed on this site are those of the author and not necessarily those of Scottrade. Scottrade does not guarantee the accuracy of, or endorse, the views or opinions of the author.