WealthTrust-Arizona Suggests To Prepare Now For Rising Tax Rates

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Tips From WealthTrust-Arizona Financial Expert On Ways to Pay Less Next Year


You should consider selling assets while the capital gains tax rate is still 15%

Now that the April 17 federal tax return deadline is behind us, people should take steps now to lessen their tax burden in 2013. Brent McQuiston, Vice President and Senior Financial Advisor with WealthTrust-Arizona, reviews key items people should keep in mind before next year’s tax filing season.

Those who have done well financially should anticipate (at a minimum) double-digit increases in their tax rates beginning in 2013, due to new taxes enacted by President Obama’s Patient Protection and Affordable Care Act (“Obamacare”). This means that families with incomes of $250,000 and above will pay an additional 3.8% tax on investment income. “The impact of allowing the Bush-era tax cuts to expire, combined with additional taxes imposed by Obamacare, will be a tax rate on dividends rising from 15% to 43.4% – a combined increase of almost 300%,” explains McQuiston.

The top tax rate on capital gains would rise from 15% to 23.8% – an increase of nearly 60% – and the estate tax would rise to 55%, as the tax rate rises and the old exemption amount is restored. Additionally, the top rate on ordinary income will rise from 35% to 43.4%, an increase of close to 25%.

How can high-end investors prepare for the very real possibility (some would say inevitability) of rising taxes in 2013 and beyond? “You should consider selling assets while the capital gains tax rate is still 15%,” suggests McQuiston. “If asset values grow by 4% per year, and the capital gains tax rate increases as scheduled from 15% to 23.8%, an investor would have to hold assets for an additional fifteen years to reach the same level he or she would have been at had he/she sold the assets initially and paid taxes at the lower rate.”

You should also consider receiving ordinary income this year rather than next. As an example, executives could exercise non-qualified stock options this year so that the resulting income is taxed at prevailing rates. 2012 will be the last chance to do so without incurring a surtax of 0.9% on W-2 incomes above $250,000, which begins January 1, 2013.

Municipal bonds will become more attractive as the tax-equivalent yield on the same bond – everything else being equal – will be higher in 2013 than in 2012. In a high-tax environment, tax-loss harvesting and buy-and-hold investing both become more attractive. “You should also consider life insurance and annuities whose tax-deferral features become more attractive when taxes rise,” suggests McQuiston. “You can also convert traditional IRAs to Roth IRAs; if you decide to do so, make sure you understand any applicable rules.”

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