Disclaimer: I am not a Certified Public Accountant (CPA), tax advisor or tax lawyer. Please talk to your CPA, btc tax advisor, or tax lawyer before making any investment decisions that could have tax consequences for your investments. Certainly one of my investment rules is know the tax ramifications of any investment that you want to create before you allow it to be, and allow it to be tax efficient, whether under current tax laws or forecasted future tax changes. Taxes and/or government fees is going to be increasing over another 5 years to help purchase the federal, state and local government deficits and future government entitlement programs (for example, health care). As an example, to fund the new medical care plan high income earners in 2013 will experience a rise in Medicare payroll tax (.9%) and yet another tax (3.8%) on qualified dividends and capital gains.
Former President George W. Bush’s tax cuts (BTC) were designed to expire by the end of 2010, reverting to the previous tax code for long-term capital gains and qualified dividends, reviving the estate tax and restoring the utmost effective marginal bracket of 39.6% at the start of 2011. On December 17, 2010 President Obama and the US Congress extended Bush’s tax cuts for another 2 years (ending January 1, 2013), made changes to the estate tax and added a 2% reduced total of the payroll (social security) tax. This is among largest stimulus packages for the US economy ever – approaching $1 trillion US.
Long-term capital gains tax (on assets held more than one year): The current tax rate of 0% for taxpayers in the 10% and 15% tax brackets at the time of 2008 and 15% for anyone else will not change for another two years. The pre-BTC rates were 10% for the 15% tax bracket and 20% for anyone else.
Qualified dividends: Qualified dividends will remain taxed at a maximum rate of 15% for another two years. The pre-BTC rate was ordinary income based in your highest tax bracket. As an example if you had been a top income earner and your tax bracket was 39.6% your qualified dividends could have been taxed at 39.6% (this might be as high as 43.4% in 2013).
Top income tax bracket: Bush’s tax cuts eliminated the utmost effective income tax bracket of 39.6% making the 35% the greatest tax bracket and created a new 10% bracket for low income earners. Congress and President Obama extended 35% as the greatest tax bracket and the 10% tax bracket for another 2 years.
Revival of the estate tax:In 2010, consequently of several unusual circumstances, there’s no limit on the size of an estate that is exempt from federal estate taxes. Starting in 2011 (and ending in 2013) the exemption is going to be $5 million per person and for a married couple as much as $10 million is going to be exempt from federal and gift taxes. The top tax rate applied to the part of estates exceeding those limits is going to be 35%, the lowest tax rate in 80 years.
Payroll tax decrease: Wage earners received a social security tax reduced total of 2%, making the tax rate 4.2% as much as the cap of $106,800 in 2011 (the cap increases in 2012). If your wage income is at or higher the cap, this can lead to savings of $2,136, or just around $40 per weekly paycheck. Congress did not renew the Making Work Pay tax credit of up to $400 for working individuals and as much as $800 for married taxpayers filing joint returns (this was up to maximum adjusted gross income level). Consequently, working people who earn significantly less than $20,000 ($40,000 for married taxpayers filing jointly) can have less profit their paycheck starting in 2011.
The tax rate on long-term capital gains and qualified dividends which are most significant to investors will stay the same for another two years. All these tax changes will revert to their pre-BTC tax rates on January 1, 2013. With President Obama, most of the House of Representatives and 1/3 of senators up for reelection by the end of 2012, expect the US tax rates to be a major campaign issue in the 2012 election.
A great strategy is always to always keep interest/ dividend-paying and non-tax efficient investments in your non-taxable accounts. Also, spy stock any investments for which there’s a top degree of difficulty determining the tax liability, i.e. trading stocks, future contracts, exotic ETFs, etc., must certanly be invested throughout your non-taxable accounts.