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Financial Planning Strategies for 2013 and Beyond [SPONSORED]


After several years of long-term tax rate uncertainty, we now have tax rate certainty. The portion of the fiscal cliff that loomed over taxpayers as the sun set on the Bush-era tax rates was solved in a last-minute political compromise. We’ve partnered with the New Jersey Society of  CPA’s to explain how this will effect you as a resident of New Jersey in the fiscal year 2013.

The new law passed January 1 has a clear dividing line: Income tax rates will increase at incomes above $400,000 for individuals and $450,000 for married couples filing jointly. Income tax rates will remain the same for anyone below those levels. Everyone, however, will see some sort of tax increase due to new Medicare taxes which come into play in 2013:

  • The temporary FICA tax holiday lapsed in 2012. The Social Security tax was temporarily lowered to 4.2 percent in 2011 and 2013. In 2013 and forward, the rate reverts to 6.2 percent.
  • Individual wage earners with salaries of more than $200,000 will be subject to an additional 0.9-percent Medicare tax (on top of the 2.9 percent that existed before).
  • Investment income (interest, dividends, capital gains) is now subject to the 3.8-percent Medicare tax once the taxpayer’s adjusted gross income exceeds $250,000 for couples or $200,000 for single filers.

 

If there’s one great take away from the fiscal cliff, it is that special consideration needs to be given to long-term financial planning in light of economic instability. By planning ahead, there are steps taxpayers can take to lessen the impact of any potential damage and keep control of their financial futures:

  • Retirement plans contributions become more valuable. The higher the current income tax rate, the more valuable tax deferral becomes. Further, investment income earned within a retirement plan is not subject to the new Medicare tax on investment income. Try to contribute more to your 401(k) or IRA. The last day to make a 2012 IRA contribution is April 15, 2013.
  • Retirement account, tax diversification: Investors are familiar with the concept of portfolio diversification. The same concept applies to the tax status of retirement accounts. Most employers offer a Roth option on 401(k) accounts, where an employee pays tax on the contributions. However, the contributions grow tax-free and are tax-free upon distribution.  Combining a Roth with a traditional 401(k) or IRA provides tax diversification that can give some protection against future tax rate uncertainty.
  • As income tax rate rise, municipal bonds become a more attractive investment compared to the taxable bonds. Along with income tax savings, the municipal interest may also avoid the new Medicare tax on investment income.
  • Evaluate your stock portfolio and consider a shift away from dividend-paying stocks into growth stocks. The new law increases federal tax rates on dividends from 15 percent in 2012 to 23.8 percent in 2013 and forward when you include the Medicare tax.

 

Thanks to the NJ Society of CPA’s for providing the information above, if you would like further information, you can visit their website by clicking HERE.

 

Christopher Colyer, CPA, M.S.T., M.B.A., is a tax director with Wiss & Company, LLP. He is a member of the New Jersey Society of CPAs. Contact him at colyer@wiss.com.

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