Despite all of the uncertainty over 2013 taxes, one thing we know for sure is that the top rate on capital gains and dividends will increase for higher income taxpayers. The culprit is the new 3.8% Medicare surtax.
This tax boosts the top rate on capital gains and dividends to 18.8%, rather than the current 15% for single taxpayers with modified adjusted gross income over $200,000 and couples over $250,000. Yes, the “marriage penalty” is back into play once again! The surtax is imposed on the lower of the filer’s net investment income or the excess of modified AGI over the thresholds. Investment income includes interest, dividends, capital gains, annuities, royalties and passive rental income. It does not include tax free interest or retirement plan distributions.
Also, if the Democrats retain the White House and the Senate this fall, there is a good chance that the top rate for capital gains will increase from 15% to 20%. So, this would then be an 8.8% increase in tax.
It may be a good time to consider selling appreciated assets this year instead of in 2013. We would suggest consulting with your financial adviser in this area.
If you are planning a Roth conversion, doing it this year may be advantageous, as this will increase your AGI and may put you over the Medicare surtax AGI limitation in future years. Deferring compensation beyond 2012 may have the same results, so it may be more beneficial to recognize income in 2012 rather than future years if the opportunity is there.
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