Now that the election is over, Congress is finally concentrating on the “fiscal cliff” and its “Taxmageddon” element. If they do nothing, a massive tax increase will hit every taxpayer and worker. It is doubtful that Congress will allow so many Americans to feel that pinch beginning with their first paycheck in January. But the fate of the capital gains rate is even more in limbo.
The current capital gains rate of 15 percent on the gain of long-term assets is scheduled to increase to 23.8 percent. The expiration of the 2001 Bush tax cuts accounts for 5 percent of the increase. But no matter what lawmakers do on the Bush tax cuts, high-income earners will pay 3.8 percent more due to the Medicare surtax included as part of the funding for ObamaCare. The surtax affects individuals with a modified adjusted gross income (AGI) of $200,000 and married couples making $250,000.
The surtax is imposed on the lower of the taxpayer’s net investment income or the excess of modified AGI over the threshold amounts. Investment income includes interest, dividends, capital gains, annuities, royalties, and passive rental income (tax-free interest and retirement income are excluded).
Two examples (based only on the 3.8 percent, not the 5 percent increase):
- A married couple with $80,000 of long-term capital gains and $290,000 of AGI will owe an extra $1,520 (3.8 percent of the $40,000 excess over $250,000).
- A single filer with an AGI of $400,000 and $50,000 of gains owes $1,900 more (3.8 percent of the $50,000).
2012 year-end tax planning tip: Sell appreciated properties before 2013.
- If you have real estate that you were considering selling anyway, try getting it sold and closed before December 31.
- The same goes for your ownership share in a closely held business. If you were thinking of selling it or passing it on to your heirs in the next year or two, consider accelerating it to this year.
- You may want to wait until closer to year-end to sell stocks with built-in gains. The uncertainty with the Bush tax cuts could cause the markets to be volatile.
All of this makes just one more reason why you need to get with your tax advisor for tax planning now. Watch our blog next week where we will share a link with you to our webinars about year-end tax-planning tips.
Related Blog Articles:
- Taxmageddon Will Hit Small Business Owners Particularly Hard! http://bit.ly/PdDOQN
- How to Survive the Effects of Taxmageddon http://bit.ly/Q0NpGw