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It was a dark and stormy night

Scott Maxwell - Monday, December 03, 2012

It was a dark and stormy night. Outside the wind howled and the light from the windows was very faint. There was no moonlight on this stormy evening and the tall trees surrounding the cabin made the darkness even darker. Upstairs the bedrooms were full and hearing some noises from the floor below the man crawled out of warm bed and felt his way to the door. He gingerly crept downstairs; arms outstretched in this not usual environment and started to cross the floor to the cabin front door. He felt it too late; the basket of laundry left out for folding and before he knew it he was flat on his back with a sharp pain across his forehead, tripped by the unseen basket in the dark.

Most of us don’t like to stumble about a strange territory in the dark but that is just what faces us in regards to tax planning here at the end of 2012. The ‘Pubs’ and ‘Dems’ are having it out on the front pages of our newspapers and no one is really sure what the landscape will look like once the wrangling is over.

At this late stage of the year we’re likely to be thinking more about the holidays and less about taxes but there are a couple of tax matters that might play a prominent role in the new year.

The first is the new Medicare tax of 3.8% slated to be levied on investment income for folks with AGI over 250K (couples) or 200k (singles). For the last period capital gains and dividends have enjoyed a favored tax status, taxed at the flat rate of 15%. This new tax has the potential to significantly increase that rate for people who have substantial incomes.

The second tax change we’re thinking of today involves those same capital gains and qualified dividends. The expiration of the Bush era tax cuts moves the rate on capital gains to 20% and leaves dividends as ‘ordinary income’ (subject to the normal income tax rates).

For folks with unrealized capital gains it could make sense to take (realize) them this year, locking in the tax rate at today’s 15%. Of course those extra gains might cause other income to be taxed at higher rates blunting some of the impact. But if it looks like you may be subject to the new Medicare tax (because of high AGI) or you are sitting on unrealized gains it would be worth a conversation with your accountant to explore potential tax friendly moves between now and year end.

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