The November jobs report was released this morning and showed that employment climbed by 146,000, following a revised 138,000 increase in October. The unemployment rate dropped to 7.7% as Superstorm Sandy’s impact on the labor market appears to be less than anticipated. The drop in the unemployment rate is somewhat misleading as the labor force “participation rate” declined from 63.8% to 63.6% (over 350,000 people left the workforce). Although the employment picture is only modestly improving, it does bode well for the economy heading into 2013 and proves that there is decent momentum in the economy now. Once Washington settles the “fiscal cliff” negotiations, the unemployment picture will once again be a major focus for the markets heading into 2013.
As Washington continues to debate the “fiscal cliff” we thought it would be beneficial to highlight some of the tax implications behind the “Bernanke coined term” and also share some of the already certain tax changes for 2013.
Here are some key tax issues to consider for year end and into 2013:
• Long term capital gains rates are scheduled to increase from 15% to 20% (23.8% with surtax) if no new negotiations are reached. Assets purchased after 2000 and held for 5 years will be taxed at 18% rate (21.8% with surtax).
• Dividend income would be taxed at ordinary income tax rates (qualified dividends currently taxed at favorable capital gains rate) if no new negotiations are reached. Therefore those in highest tax bracket may be taxed as high as 43.4% on dividends when including 3.8% Medicare contribution tax.
• Social Security tax “holiday” expected to expire and return to 6.2%
Tax changes that will take place in 2013 regardless of the outcome of the Fiscal Cliff negotiations:
- Additional Medicare Hospital Insurance (HI) tax of .9% (total of 2.35% for employee portion) on earned income above $200,000 single/$250,000 married filed jointly. This will take effect in 2013 regardless of whether Congress extends the tax cuts.
- 3.8% Medicare Contribution tax on “unearned” income for amounts above income threshold of $200,000 single/$250,000 married filed jointly. Unearned income includes interest, dividends, rental income, and capital gains. . This is part of the means to pay for the “Obamacare” legislation.
• IRA annual contributions increase to $5,500 in 2013; $1,000 catch up provision remains for those 50 and over
• Elective deferral contributions limit to retirement plans (401k, 403b) increase to $17,500; $23,000 total for participants 50 and over.
• Gift tax annual exemption increases to $14,000 in 2013
Year-end planning to consider:
• Parents/grandparents: Consider contributing to a 529 plan if your state provides a state tax deduction. (Missouri’s MOST 529 plan allows for a state income tax deduction of up to $8,000 ($16,000 if married, filling jointly) each year for contributions to their accounts).
• Consider accelerating recognition of income into 2012 if level of income will be same or higher in 2013.
• Consider recognizing long term gains (not short term, which are taxed at ordinary income rates) as they could go from 15% to 23.8%
• If in 15% tax bracket or lower ($70,700 taxable income or lower for married, filling jointly) you can realize long term capital gains without having additional tax if you remain in lower brackets
Expect some delays on the part of the IRS and your tax preparer;
• The IRS has stated they will no longer provide anticipated dates for filers to receive their refunds and will suggest that filers can expect their refund within 21 days from the date the return was filed.
• With the uncertainty in tax laws it is expected that there will be a delay in how early IRS can accept returns. Therefore, this will impact many taxpayers ability to file early this year.