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Some of the New Tax Law Changes

Steven Anderson

For many Americans, tax time can be daunting. This year, sifting through the clutter of tax changes probably seems even more intimidating. Assuming you do not have time to read and comprehend documents like the 150-plus page turner known as the American Taxpayer Relief Act of 2012*, here are some facts you should know.

For all income earners

• Increased contribution limits for retirement – Investors can now increase their contribution to a traditional IRA from $5,000 to $5,500. Additionally, 401(k) investors can now increase their contribution by $500, up to $17,500 annually, not including employer match contributions. The same increase applies to 403(b) and most 457 plan participants. Finally, the annual gift exclusion increases from $13,000 to $14,000.

• Social Security rate increase – In a change you’ve likely already noticed, the contribution limits for Social Security increased at the beginning of 2013 by 6.2% up to $113,700.

For individuals earning over $200,000 ($250,000 for married filing jointly) 

• Medicare payroll tax – Taxpayers will owe an additional 0.9% tax towards Medicare on income over the threshold of $200,000 for individuals and $250,000 for married couples filing jointly.

For individuals earning over $250,000 ($300,000 married filing jointly) 

• New personal exemption – When it comes time to file taxes in 2013, the personal exemption phase out (PEP) of $3,900 will be reduced by 2% for every $2,500 over the income threshold of $250,000 for individuals and $300,000 for married filing jointly, unless Congress votes to extend the repeal again

• Itemization restrictions – Known as the Pease provision, this sets a limit on itemized deductions among high-income earners. Income over the applicable amount will trigger an itemized deduction limitation that is (a) the lesser of 3% of adjusted gross income or (b) 80% of the itemized deductions otherwise allowable in that taxable year.

For individuals earning over $400,000 ($450,000 married filing jointly) 

• Change in tax bracket for higher income earners – These individuals will see a 4.6% jump in their tax bracket next year from 35% to 39.6%. Additionally, those in this same bracket may be subject to new capital gains rate increases from the current 15% to 20%.

Individually these tax law changes are costly, but the effect they have on your income can be even more costly to progress toward other financial goals such as saving for retirement. It may be an opportunity to consider some investing alternatives.

Converting to a Roth 401(k) could be an attractive option for those whose employers offer it. The investment vehicle, similar to its Roth IRA kin, places money into an account with after-tax dollars, allowing an individual to take it out tax-free after the age of 59 ½. However, unlike its Roth IRA counterpart, it is not subject to the $5,500 IRS annual contribution limit. Find out if your company 401(k) supports this type of vehicle and then speak with an advisor regarding the many factors to consider that can determine the effectiveness of such an investment strategy.

Additionally, if you have a 401(k) or 403(b) plan through your employer and your employer provides a matching contribution, fund this account up to the limits of the matching contribution. For example, if your employer matches 50 cents on every dollar that you contribute to your 401(k), up to 6 percent of your annual salary, you should contribute 6% of your salary to your 401(k).

By participating in your qualified retirement plan at work and receiving a matching contribution from your employer, you’re receiving a guaranteed rate of return of no less than 50% per year.

While more nuanced than we can explain here, you should not feel it necessary to tackle these changes alone. Consult experts who can explain the complexities and will work with you to develop or alter a strategy to navigate the effects on your income stream and overall portfolio.

* Note: For the full ATRA, click here. 

This article is provided by Steven C. Anderson, CIMA, a financial advisor at RBC Wealth Management in Reno, and was prepared by or in cooperation with RBC Wealth Management. He can be reached through his website at www.stevencanderson.com or 775-824-7159.

The information included in this article is not intended to be used as the primary basis for making investment decisions. RBC Wealth Management, a division of RBC Capital Markets LLC, member NYSE/FINRA/SIPC

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