Washington’s agreement early this month on tax legislation brought good news for some and bad news for others.
But from an investing and financial planning perspective, the agreement replaced a number of question marks with certainty. And certainty around tax rates and tax policy means it’s easier to make the best decisions for specific clients’ needs.
Here’s a rundown of some of the highlights from the American Taxpayer Relief Act of 2012:
- Ordinary income: The tax deal increases rates to 39.6% for individuals earning more than $400,000 a year and married couples earning more than $450,000. Keep in mind that the new healthcare law adds a .9% tax increase on ordinary income over $200,000 for individuals and $250,000 for couples.
- Capital gains and dividends. The Taxpayer Relief Act was kind to investors. The Obama administration proposed a top rate on dividends of 39.6%. Instead, the rate on dividends as well as capital gains is 20%. The top rate starts above $400,000 for single filers and $450,000 for joint filers.
- Estate Tax: Congress kept the $5 million-per-person exemption in place but increased the top rate to 40%. In addition, the $5 million exemption remains in place for gift tax purposes.
- Alternative minimum tax: Congress provided a long-overdue fix for the AMT. The tax is designed to make sure that the wealthy can’t escape paying their fair share, but inflation over the years has lifted many middle-class households into the AMT’s clutches. The new law solves that problem permanently by indexing the tax to inflation. Bottom line: Ordinary households won’t be subject to a tax not intended for them.
- Tax loopholes: Many taxpayers will lose access to certain deductions. For instance, mortgage-mortgage-interest deductions will now be capped for individuals with income levels above $250,000 and joint filers with income above $300,000.
So we have certainty about taxes at long last. And that certainty enables us to make wiser decisions about everything from which investments to place in taxable versus non-taxable accounts to when and how we should cash out our investments.
They say that the only certainties in life are death and taxes—and taxes just became a little more certain. For reaching your financial goals, that’s a good thing.