Tax Planning from the 2012 January / February issue of Planning Perspectives

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NAPFA Planning Perspectives Jan-Feb 2012

The latest Jan/Feb 2012 issue of NAPFA Planning Perspectives has an interesting articles entitled “Tax Outlook 2012 and 2013” by Robert Klosterman of White Oaks Wealth Advisors and includes this:

If the so-called “Bush tax cuts” expire at the end of 2012, the federal longterm capital gains tax would rise from 15 percent to 20 percent. Also, a 3.8-percent surtax on investment income and gains for taxable incomes above $200,000 single and $250,000 joint returns has been proposed as a way to fund surging costs in Medicare.

It doesn’t stop there: income from interest, dividends, annuities, rents, royalties, income from passive activities, gains from securities and commodities trading, and gains from certain dispositions of business property could be included. (Items not included for the calculation are retirement income from pensions, IRA distributions, Social Security, life insurance proceeds, municipal bond interest, and income from a business you materially participate in.)

While pensions, IRAs, and company provided annuities are not covered by the surtax, they do count toward the income threshold that would trigger the tax liability. For example, if $250,000 of family income comes from pensions and/or IRA distributions, all investment income would be subject to the Medicare tax on a joint return. If $50,000 comes from pensions and IRAs and $250,000 from interest, dividends and capital gains, then $50,000 is subject to the Medicare tax.

How can you respond if these new taxes are enacted? One option is to do a Roth conversion so that you can pay taxes now for those retirement funds. This avoids having investment income in 2013 that will put you over the income threshold limits.

Planning Perspectives, NAPFA’s free quarterly e-newsletter, shares short educational articles submitted by NAPFA members. Subscribe here to receive future issues. Each quarter NAPFA will email you a link to the latest issue. NAPFA will never share your email address with anyone! You have the option to unsubscribe at anytime.

You can read this issue or you can peruse the entire list of back issues.

And while we are recommending great reading, you can subscribe to our corporate newsletter or subscribe to receive Marotta On Money via email. New subscribers to Marotta On Money receive free access to a hour long Roth IRA Conversion 2012 Seminar: How to put your money where it will never be taxed again.

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David John Marotta is the Founder and President of Marotta Wealth Management. He played for the State Department chess team at age 11, graduated from Stanford, taught Computer and Information Science, and still loves math and strategy games. In addition to his financial writing, David is a co-author of The Haunting of Bob Cratchit.