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Cut the Sting of 2013 Tax Hikes


There are two new taxes in 2013 for high-income Americans, but you don't have to be helpless. You can reduce future taxes with good planning and decisive action.

There are two new taxes in 2013 for high-income Americans, but you don't have to be helpless. You can reduce future taxes with good planning and decisive action.

The new 0.9% increase in Medicare payroll taxes applies to employees and self-employed individuals earning more than $200,000 and married couples earning more than $250,000 a year. Only earned income above the threshold is subject to the extra tax.

There’s also a 3.8% unearned income tax on net investment income above those levels, based on modified adjusted gross income (MAGI). That tax will be based on the lesser of net investment income or MAGI.


A married couple with $300,000 of MAGI, including $50,000 of investment income, would pay the 3.8% tax ($1,900) on $50,000, and they wouldn’t pay any of the 0.9% tax.

Here are some steps you can take to prepare for the upcoming taxes.

Consider accelerating income and deferring expenses

If possible, move up compensation or income you would receive in 2013 to 2012 to avoid the new taxes. This may be difficult for employees, but is worth discussing with your employer if you are expecting to receive a bonus in early 2013.

Affected self-employed individuals can request that clients pay year-end invoices in 2012. They also can put off large purchases of equipment and other expenses until 2013 to reduce income and exposure to the new taxes next year.

Maximize your contributions to retirement plan(s)

Contributions to employer-sponsored plans reduce taxable income and can help cut the net investment income tax. For instance, a couple making $275,000 who contributes $34,000 combined to their 401(k)s reduces their taxable income to $241,000, which is below the threshold. Contributions to Simplified Employee Pension (SEP), SIMPLE IRA and other qualified plans are also subtracted from your taxable income.

Capital gains this year, losses next

The rest of 2012 may be the right time to sell appreciated investments. Today’s top rate of 15% on long-term capital gains will increase to 20% in 2013 if Congress doesn’t extend the Bush-era tax cuts. So, selling this year may save you as much as 8.8% in taxes.

That may sound like a slam-dunk, but you need to take a close look at your portfolio and tax situation before you do anything.

On the flip side, consider selling losers and taking investment losses next year. Losses offset capital gains triggered during the year, plus up to $3,000 in ordinary income if your losses exceed gains. Taking losses next year will help you reduce your liability for the new taxes.

Shift income-producing investments

If you don’t depend on investment income, you should hold most income-producing securities in retirement accounts. Consider selling some of your interest- and dividend-paying securities in your taxable accounts and repurchasing them in an IRA or a 401(k) account.

You can reinvest the proceeds in growth investments that pay little or no dividends and in tax-exempt municipal bonds. This will reduce net investment income, MAGI and taxes.

Tax triple-play

Consider giving income-producing investments to charity. You’ll get an income tax deduction for the fair market value of the security (as long as you’ve owned it for more than a year), avoid the capital-gains tax and cut your future investment income.

Traditional IRA to a Roth IRA

While distributions from traditional IRAs are excluded in calculating net investment income, they are included when calculating MAGI, potentially increasing your exposure to the new tax. With a Roth IRA, distributions are income-tax free and are excluded from both net investment income and MAGI.

The conversion amount counts as taxable income. But it’s often worth paying a one-time tax in 2012 to get future Roth tax benefits if your income tax rates will stay the same or be higher in the future.

Shomari D. Hearn is vice president of Palisades Hudson Financial Group, in charge of the fee-only financial planning firm’s Fort Lauderdale office. He holds the Certified Financial Planner (CFP) designation and can be reached at Shomari@palisadeshudson.com.

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