Taylor Shulte | These Financial Times
On January 1, 2013, Congress passed “The American Taxpayer Relief Act of 2012 (aka fiscal cliff deal),” offering numerous fiscal cliff solutions.
In an effort to help simplify and bring some clarity to the deal, we have provided a summary of five major provisions that have a broader application. We hope it is useful in helping you plan for 2013.
1) Individual Tax Rates. Beginning January 1, 2013, the 10%, 15%, 25%, 28%, 33% and 35% tax brackets will remain in place. A new top rate of 39.6% is imposed on taxable income over $400,000 for single filers, $450,000 for married filing joint, and $425,000 for head of household. This will not impact 2012 income tax returns.
2) Capital Gains and Qualified Dividend Rates. Dividends and capital gains are taxed at 20%, up from 15%, for taxpayers with taxable income over $400,000 for single filers, $450,000 for married filing joint, and $425,000 for head of household.
3) Payroll Tax. As you might have noticed, your paycheck just got a little smaller. The 2% payroll tax holiday has expired and payroll taxes were increased to 6.2% from 4.2%. CNN reported that a worker with a $41,000 salary – the national average – will have $32 less in a biweekly paycheck.
4) Estate Tax. For estate, gift, and generation skipping, the exemption will permanently remain at $5 million indexed for inflation ($5.12 million in 2012). However, the top tax rate will increase to 40%, from 35% effective January 1, 2013.
5) Alternative Minimum Tax. The higher exemption amounts for Alternative Minimum Tax (AMT) are made permanent. The AMT patch is retroactive to 2012 and will be indexed annually for inflation. This will result in lower taxes for the 60 million Americans that would have been impacted.
According to a recent Wall Street Journal forecasting survey, the fiscal cliff deal will trim growth by about 0.7% this year. While a lackluster growth rate of around 2% is expected, we remain optimistic that global monetary easing coupled with a continued recovery in housing and record amounts of cash on the sidelines will contribute to another positive year in equities.
In particular, we continue to favor stocks over bonds, large-cap stocks over small-cap, and emerging market equities over developed market equities. We prefer big companies that not only pay dividends but also have a long history of increasing them. Many of these are names you know, such as Johnson & Johnson and Coca Cola.
The fiscal cliff deal has many implications and the long-term impact is yet to be determined. Work with your Advisor(s) to determine how the provisions will impact you and put an action plan in place – it is ours to deal with now. And remember, on average, the tax code has a significant change every nine months, so stay tuned!
Note: This information is intended to provide an overview of the changes that will occur. We encourage you to contact your professional advisor with questions specific to your tax situation.
Taylor Schulte is a Financial Advisor for Beverly Hills Wealth Management in Downtown San Diego. Taylor specializes in providing independent, objective, financial advice to all types of investors and organizations. He is dedicated to providing a high level of customer service along with tailored wealth management solutions to simplify and enhance the quality of his clients’ lives. He can be reached at taylor.schulte@bhwm.com
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