Expiring Tax Provisions

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I thought you might find this quick listing of selected expired/expiring tax provisions useful. As you know, Congress could pass legislation at any time extending or revising any or all of these provisions.

* SOCIAL SECURITY TAXES. Employee’s share will increase
to 6.2% after 2012, up from 4.2%.

* INCOME TAX RATES. 2012 rates of 10%, 15%, 25%, 28%,
33%, and 35% will change to 15%, 28%, 31%, 36% and
39.6% for 2013.

* CAPITAL GAINS. Maximum long-term rate will increase
from 15% to 20% after 2012.

* DIVIDENDS. Top 15% rate will be eliminated; dividends
will be taxed as ordinary income with a top rate of
39.6%.

* CHILD TAX CREDIT. Current $1,000 credit per qualifying
child will be reduced to $500 after 2012.

* AMT. Exemption amounts for 2012 are $33,750 for
singles, $45,000 for couples, down from 2011 “patched”
amounts of $48,450 for singles and $74,450 for couples.

* ESTATE TAX. Top 2013 rate will increase to 55% (up
from 35%); exclusion amount will be reduced to
$1,000,000 (down from 2012 amount of $5,120,000).

* DEDUCTIONS & EXEMPTIONS. After 2012, higher-income
taxpayers will again lose a portion of itemized
deductions and personal exemptions.

* DEPRECIATION. Section 179 expensing limit will be
reduced to $25,000, with a total qualifying property
limit of $200,000, down from 2012 levels of $139,000
and $560,000 respectively. 50% bonus depreciation
will expire.

* EDUCATION. Education savings account contribution
limit will be $500, down from 2012 limit of $2,000.
Expanded American Opportunity Credit will expire and
be replaced by prior Hope Credit.

* TAX EXTENDERS. Tax breaks that expired after 2011:
Teachers’ classroom expense deduction, state and local
sales tax deduction, tax-free charitable IRA
distributions for those70 ? and older, higher
education tuition deduction, business R&D credit,
15-year depreciation for leasehold improvements and
restaurant property.

The uncertainty in the tax rules makes the approaching tax filing season more challenging than usual.

Rethink your capital gains strategy this year

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The typical investment advice at year-end is to sell losing stocks to offset gains you have taken for the year. This year that strategy may just be the wrong way to go. Here’s why.

The maximum rate on long-term capital gains is scheduled to rise from the current 15% to 20% next year. Also scheduled for 2013 is an increase in the top rate on dividend income from the current 15% to 39.6%.

If you expect these scheduled rates to occur in 2013, it may make sense to harvest gains before year-end. Remember, wash sale rules do not apply to gains, so you can repurchase a similar investment immediately. This tactic may allow you to “reset” your basis for a future sale while benefiting from current low rates.

What about investment losses? Despite the uncertainty over a possible increase in tax rates, it’s a good bet that some rules — such as those covering capital losses — will not change. When pruning stocks from your portfolio, keep in mind that capital losses are more valuable when tax rates are higher. You may want to postpone taking losses until 2013 if you think rates will be higher next year.

In your investment review, don’t overlook the new 3.8% Medicare surtax that will apply to certain unearned income, including interest, dividends, capital gains, and passive rental income. If this surtax goes into effect as scheduled, an individual with adjusted gross income of $200,000 or more ($250,000 for couples filing jointly) could pay an effective federal income tax rate of 43.4% on some income.

Individual situations will vary, so consider all the relevant factors in making your year-end decisions. For assistance in your analysis, contact our office.

Give your children some lessons about money

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There’s one important subject that your children may not learn in school: personal finance. If you want your kids to pick up good money skills and become financially responsible adults, you should give them some training yourself.

Pre-schoolers and teenagers obviously have different financial concerns and abilities. But there are a few basic lessons that all children should learn by the time they enter college or start a career.

*Having money means making choices. Teach your child how to choose between spending and saving, and how to do both intelligently. A regular allowance will help your child gain real-world financial experience.

*Money requires planning. At the appropriate age (usually about nine or ten), show your child how to develop a simple spending plan. In later years, show how to plan for larger expenditures.

*Money means responsibility. Inevitably, your child is going to make some money mistakes. Try to avoid criticism, but don’t automatically fix every problem and let your child off the hook. Help analyze the reason for the mistake, and suggest how to avoid it in the future.

*Money needs to be managed. Specific lessons might range from how to compare interest rates on savings accounts, to the pros and cons of mutual fund investing. But there should be one common element to all of your teaching in this area: money doesn’t take care of itself.

The way you handle your money may be the most powerful lesson of all for your children. For your child’s sake, as well as your own financial well-being, it’s important to practice what you preach.