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Finally, Taxes Come into Focus

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.

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