taxmageddon 2013

Taxmageddon 2013: These Filers Are in the Crosshairs

As Taxmageddon 2013 looms against the back drop of Election 2012 one thing is for certain: upper-income filers will take a hit in 2013 even if no new taxes are imposed, as will owners of some small businesses.

In Part One of our series on the tax outlook for 2013, we described how scheduled tax-law changes will affect capital gains - boosting taxes on long-term profits from 15% to 23.8% for some taxpayers. And, in Part Two, which ran last Thursday, we explained that dividend investors could suffer even more, with some seeing their tax bite rise from the current 15% to as much as 43.4%.

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Taxmageddon 2013: How to Prepare for Looming Tax Law Changes

It's often said the only things certain in life are death and taxes - but this year, even taxes aren't a certainty.

At least not the specifics, thanks to Election 2012 and Taxmageddon 2013. Investors are left with more questions than answers.

Will the so-called Bush tax cuts expire as scheduled - or be extended? Will levies designed to help implement and pay for Obamacare go into effect - or will Republicans finally succeed in repealing the new healthcare program?

Will President Barack Obama view his re-election as a mandate to impose more new taxes to expand social programs, or will a newly-elected President Mitt Romney cut taxes in a bid to encourage renewed economic growth?

That's why it's important for investors to look at the range of possibilities relative to their current financial holdings and take precautionary actions where appropriate.

This special Money Morning series will examine a number of upcoming or proposed changes in tax laws and rates and suggest strategies to minimize their impact on your investments. Or better yet, take advantage of them if possible.

With Taxmageddon, Rates are Set to Rise

As it stands, there are more than two dozen tax-law changes scheduled to take effect in 2013. Some of them target nearly every single taxpayer while others are more narrowly focused on individuals, such as small business stockholders and home sellers.

Of most immediate concern to investors is the scheduled increase in tax rates on capital gains. Currently, the federal government recognizes three types of capital gains:

  • Short-term gains - Profits from assets held for less than one full year. These gains are taxed as ordinary income at a rate based on your total personal income, with percentages now ranging from 10% to 35%.
  • Ordinary long-term gains - Profits from assets held for more than one year, now taxed at a maximum rate of 15%, regardless of income from other sources. (Note: Individual taxpayers in the 10% and 15% brackets now pay no tax on long-term capital gains but merely include them with other taxable income. However, in 2013 these taxpayers will be subject to a 10% tax on long-term gains.)
  • Qualified long-term gains - Profits from assets purchased after the 2000 tax year and held for a minimum of five years. Qualified gains are currently taxed at a maximum 15% rate.


This relatively simple structure will become more complicated in 2013, for several reasons...

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GOP Slams President Obama's Taxmageddon Proposal

Following a spate of moribund economic news and the looming Taxmageddon that could further derail the sluggish U.S. economy, President Obama called on Congress yesterday (Monday) for help.

President Obama proposed that Congress pass a one-year extension of the Bush-era tax cuts set to expire at year's end for households earning $250,000 or less. He suggested letting the cuts expire for the wealthiest bunch.

"We don't need more top-down economics," the president said in an early afternoon press conference at the White House. "We tried that theory...we can't afford to go back to it. That's why I believe it's time for the cuts for the wealthiest Americans, including myself, to expire."

The Bush-era tax cuts, set up as a temporary measure, are due to expire on Dec. 31, meaning if they do the majority of Americans will see a steep rise in taxes overnight. A number of other tax increases are also set to take effect, giving the event the ominous Taxmageddon moniker.

The implications are huge. Families living paycheck to paycheck, or unemployment check to unemployment check, will be even more strapped. The result is an almost certain recession.

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Are You Ready for "Taxmageddon"?

A slow moving train wreck known as "Taxmageddon" is creeping toward U.S. taxpayers.

You see, if Congress doesn't act by year's end, numerous tax breaks will expire -- and hit every American taxpayer squarely in the wallet.

It's a fiscal tsunami that will strike as early as December. The damage will be so widespread it could derail the entire U.S. economy.

Nobody in Washington, however, is doing anything about it.

"You just don't get the sense that there's even a secret plan yet," Maya MacGuineas, president of the bipartisan Committee for a Responsible Federal Budget, told The Washington Post. "It's scary."

If you're not worried yet, you should be.

Here's why...

"Taxmageddon" Means Higher Taxes for All

The Bush-era tax cuts will end on Jan. 1, 2013, unless Congress intervenes.

Also set to expire that day will be a temporary payroll-tax holiday on social security.

The tax changes won't just slam a few income brackets; they'll reach all taxpayers.

Every one of the existing income tax brackets will be ratcheted up, starting with the lowest 10% bracket, which will be hiked to 15%. The 25% bracket will jump to 28%; the 28% bracket will go to 31%; the 33% bracket will be replaced by a 36% bracket and the 35% bracket will soar to 39.6%.

Stock market investors will also be punished.

Right now, the maximum tax rate on long-term capital gains and dividends is only 15%. Starting next year, the maximum rate on long-term gains is scheduled to increase to 20%.
But get this -- the maximum rate on dividends will skyrocket to a whopping 39.6%.

That's not all.

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