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8 Key Planning Issues for 2013

If Congress allows Bush-era tax cuts to expire next year, as many expect, planners everywhere must be aware of the "fiscal cliff" their clients will confront.


According to Wilton, N.Y.-based planner and author Bill Losey of Bill Losey Retirement Solutions, planners should take the following eight scenarios into consideration.


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1. Consider Prioritizing Tax Reductions 1. Consider Prioritizing Tax Reductions

If the Bush-era tax cuts sunset, everyone will see higher taxes, Losey says. The federal income tax brackets (10%, 15%, 25%, 28%, 33%, 35%) of the last nine years would be replaced by five higher ones (15%, 28%, 31%, 36%, 39.6%) next year.

2. High Earners May Want to Watch Their Incomes 2. High Earners May Want to Watch Their Incomes

If a client’s earned income for 2013 tops $200,000 – or exceeds $250,000, in the case of a couple – he or she may face two Medicare surtaxes, according to Losey. While the Medicare payroll tax on earned incomes above these levels is set to rise to 2.35% from the current 1.45%, the second surtax may prove to be the real annoyance, Losey says. A 3.8% charge is scheduled on net investment income for individuals and couples whose modified adjusted gross incomes exceed these levels.


Losey points to several issues regarding this second surtax: It would actually be levied on the lesser of two amounts – either a client’s net investment income or excess modified adjusted gross income above the $200,000/$250,000 levels. Most investment income derived from material participation in a business activity would be exempt from the 3.8% surtax, along with tax-exempt interest income, tax-exempt gains realized from selling a home, retirement plan distributions and income that would already be subject to self-employed Social Security tax.


The bottom line, Losey maintains, is that a bonus, an IRA distribution, or a sizable capital gain may push a client’s earned income above these thresholds – and it will be wise to consider what impact this could have.

3. Clients’ Take-Home Pay May Drop in 2013 3. Clients’ Take-Home Pay May Drop in 2013

Social Security taxes for paycheck employees are slated to return to the 6.2% level in 2013. They’ve been at 4.2% since the start of 2011. If a client earns $75,000 during 2013, she will take home about $1,500 less than she would have in 2012. If she earns $50,000, she would take home $1,000 less, Losey says.

4. Any 2013 Social Security Cost-of-Living Increase May Be Minor 4. Any 2013 Social Security Cost-of-Living Increase May Be Minor

In 2012, the cost of living adjustment to Social Security benefits was 3.6%. Before that, Social Security recipients went three years without a COLA. As inflation is mild, whatever COLA is announced this fall in tandem with Medicare premium changes may not amount to much, Losey says.

5. Medical Expense Deductions May Shrink 5. Medical Expense Deductions May Shrink

If a client is thinking about delaying a procedure or surgery until 2013, Losey says, he should remember that next year he may only get to deduct unreimbursed medical expenses that exceed 7.5% – rather than 10% – of his taxable income. (This is assuming he likes to itemize deductions.) Clients who are 65 or older get a bit of a break, he adds: they will still be able to deduct unreimbursed medical expenses up to 10% of their taxable income on their federal returns through 2016.

6. Clients May Find a Better Medicare Advantage Plan for 2013 6. Clients May Find a Better Medicare Advantage Plan for 2013

The Affordable Care Act has altered the landscape for these plans (and their prescription drug coverage), Losey says. Using Medicare’s Plan Finder clients may discover similar or better coverage at lower premiums. The enrollment period for 2013 coverage runs from October 15 to December 7.

7. Anyone Without Work May Find a Safety Net Gone 7. Anyone Without Work May Find a Safety Net Gone

Extended jobless benefits may disappear for the long-term unemployed at the start of 2013. Will Congress extend them once again? Possibly, Losey says, adding that this isn’t a given.

8. Estate and Gift Tax Exemptions May Shrink Significantly 8. Estate and Gift Tax Exemptions May Shrink Significantly

The (unified) lifetime federal gift and estate tax exemption is currently set at $5.12 million – and it will drop to $1 million in 2013 if Congress stands pat, Losey says. Federal gift tax and estate tax rates are also slated to max out at 55% in 2013, as opposed to 35% in 2012. Right now, an unused portion of a $5.12 million lifetime exemption is portable to a surviving spouse; in 2013, that portability should disappear, according to Losey.?Many analysts and economists think that Congress will eventually abide by President Obama’s wishes and take things back to 2009 instead of 2001 – that is, a $3.5 million estate tax exemption, a $1 million lifetime gift tax exemption, and a 45% maximum estate and gift tax rate.


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If Congress allows Bush-era tax cuts to expire next year, as many expect, planners everywhere must be aware of the “fiscal cliff” their clients will confront.

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