Potential income tax rate, long-term capital gain & dividend rate increases. How might your financial picture be affected?

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There are less than two weeks left until November 6^th, Election Day, when our votes will have been cast and we’ll anxiously await to see whether Mr. Obama or Mr. Romney will be leading our country.  We are hopeful that America will move towards an end to the recession and an on to an era of a robust economic recovery!  However, as prudent taxpayers, we should keep in mind that the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), more commonly referred to as the “Bush Tax Cuts” are set to expire shortly.    Previously, in 2010, the EGTRRA was to expire and Congress elected to extend most of its’ original provisions until December 31, 2012.  No matter which President will be leading us, it isn’t certain whether our current tax laws will change or whether Congress will extend them yet again, while working on possible tax code reform.

With this current state of uncertainty, the best way to manage our own tax situation is to be aware of how tax laws may change if the EGTRRA is not extended.  There are potential changes to numerous tax provisions that could impact your financial situation, including:  income tax rates, long-term capital gain rates, dividend rates, Medicare rates, limits on personal exemptions and itemized deductions, the marriage penalty, education benefits, and estate taxes.  For simplicity’s sake, the topic of this blog is limited to possible changes to income tax rates, as well as, long-term capital gain and dividend rate changes.

 INCOME TAX RATES

ORDINARY INCOME MARRIED FILING JOINTLY	ORDINARY INCOME SINGLE FILER	2012 RATES	2013 RATES
$0 - $17,400	$0 - $8,700	10%	15%
$17,400 - $70,700	$8,700 - $35,350	15%	15%
$70,700 - $142,700	$35,350 - $85,000	25%	28%
$142,700 - $217,450	$85,000 - $178,650	28%	31%
$217,450 - $388,350	$178,650 - $388,350	33%	36%
Over $388,350	Over $388,350	35%	39.6%

 The new 2013 tax rate structure would eliminate the 10% bracket, while all of the remaining brackets above 15% will be increasing at least 3%.  Since the brackets don’t take into account the rate of inflation, it’s wise to consider your personal financial situation and whether the rate change may affect your overall financial picture.

 LONG-TERM CAPITAL GAINS RATES

	2012 Rates	2013 Rates
Income less than $70,700	0%	10%
Income more than $70,700	15%	20%

 If Congress doesn’t act quickly after the election, the 0% tax rate on long-term capital gains will rise to 10% while those with income greater than $70,700 will see their rate on gains jump to 20%.

DIVIDEND RATES                                            

	2012 Rates	2013 Rates
Ordinary Dividends	Ordinary Income Tax Rates	Ordinary Income Tax Rates
Qualified Dividends	Long-term Capital Gains Rates	Ordinary Income Tax Rates

Like ordinary dividend tax rates, qualified dividends will no longer be taxed at the more favorable long-term capital gains rates.  Similarly, they will also be taxed at ordinary income tax rates.  As a result, the 0% qualified dividend rate will be eliminated and most investors will see an increase in their qualified dividend tax rate, equivalent to the above 2013 ordinary income tax rates.  Therefore, to be a prudent investor and taxpayer, you may want to take a review of your current portfolio and investment strategy and consider whether you should sell certain stocks to realize capital gain income in 2012 rather than in 2013.   

For more information regarding the provisions of the Bush Tax cuts and the possible implications on taxpayers in 2013 if they are not extended, read The Library of Congress’s Congressional Research Service article by Margot L. Crandall-Hollick, entitled, “An Overview of Tax Provisions Expiring in 2012.” at this link http://www.fas.org/sgp/crs/misc/R42485.pdf.

Please revisit our blog for information regarding potential tax rate increases related to the various other provisions of the EGTRRA which may be expiring in December 2012. In the meantime, feel free to contact Holdsworth & Co.’s knowledgeable CPAs if you have any questions regarding possible changes to your tax situation in the upcoming year and …BE SURE TO LET YOUR VOICE BE HEARD & VOTE BY NOVEMBER 6TH!