As a part of the health care reform law, beginning Jan. 1, 2013, the Medicare tax on salary and self-employment income will go up by 0.9 percent from the current 2.9 percent. Currently for employees, 1.45 percent is withheld from paychecks, and the other 1.45 percent is paid by employers. The self-employed pay the whole 2.9 percent.
The new 3.8 percent Medicare surtax will be imposed on unearned income for individual taxpayers with an adjusted gross income in excess of $200,000 and married couples filing jointly in excess of $250,000. Booth says taxpayers in this category need to determine whether to make quarterly estimated tax payments starting in 2013.
“If you have a lot of investments that produce dividend or capital gains and your income is over the new thresholds, then you may want to consider some strategies before year-end to avoid higher taxes in 2013,” Booth said.
Shawna L. Theriault, a certified financial planner and certified public accountant at Kennesaw-based Henssler Financial, said accelerating income into 2012 could help some taxpayers avoid paying higher taxes on that income.
“Depending on the individual tax situation, we would encourage some individuals to accelerate ordinary income from 2013 to 2012 as the current tax rates of 10, 15, 25, 28, 33 and 35 percent are set to increase to 15, 28, 31, 36 and 39.6 percent levels,” she said.
Theriault said that in addition to the potential increase in ordinary income tax rates and the Medicare surtax, the 2 percent tax cut on the employee portion of the social security payroll tax is set to expire at year end and will revert to 6.2 percent from 4.2 percent.
“Employers could consider moving bonuses and employee recognition payments to 2012 as a benefit to their employees,” she said.
Also starting in 2013, as the Bush tax cuts expire, the maximum federal income tax rate on long-term capital gains and dividends is rising from 15 percent to 20 percent.
Booth said selling some assets this year could mean a lower tax bill.
“That said, the tax tail should not wag the investment dog,” he said. “You should only sell assets that you are thinking about selling anyway.”
However, Theriault said stock sales are trickier than real estate sales.
“Our concern is that if you sell stocks now and lock in gains, the market could pull back and now you have locked in gains at higher stock prices,” she said.
She added that another strategy to consider is carrying forward capital loss.
“Individuals may actually want to increase their capital losses this year to have more to carry forward to tax years where the taxes are higher.”