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Year-End Tax Update

November 29th, 2012

As we approach the end of 2012 there are many questions surrounding the upcoming “Fiscal Cliff” and Affordable Care Act that should be addressed. As always, we take into consideration individual client circumstances as part of our wealth management process, and how possible tax law changes may affect our specific recommendations to you the client.


What is the “Fiscal Cliff”? It is the costly impact on taxpayers and the economy from the combination of Sequestration, and the expiration of the Bush tax cuts.


Sequestration Deficit Reduction


The Budget Control Act of 2011 required that $1.2 trillion in cuts be divided equally over 9 years and split 50/50 between defense and discretionary domestic spending if the “Super Committee” was unable to agree on a $1.2 trillion deficit reduction package by November 23, 2011.  This Committee was unable to agree on the package by the deadline. Therefore, the automatic cuts are scheduled to be implemented beginning in January 2013 unless Congress can agree on a plan to avoid the cuts. If an agreement is not reached, most taxpayers will feel the negative impact of this colossal failure.


Expiration of the “Bush Tax Cuts”


These temporary tax reductions were originally set to expire in 2011 for all tax- payers, but a two year extension was approved in 2010 resulting in the current expiration date of December 31, 2012. Most notable tax expirations for all tax payers are:


Individual income tax rates increase from 10%-35% to 15%-39.6%

Long-term capital gain rates increase from 0%-15% to 10%-20%

Tax rates on qualified dividends increase from 0%-15% to 15%-39.6%

Estate and gift taxes increase from a $5.12 million exemption and a top rate of 35% to $1.0 million and 55%, respectively

The President has proposed that the expiration of the tax cuts (increased tax rates) only impact those that have Adjusted Gross Income (AGI) exceeding $200,000 for single filers and exceeding $250,000 for married filers.  There is currently considerable negotiation between the President and Congress around all elements of this scheduled tax expiration including what the actual AGI cut-off and the final tax rates will be for all categories listed above.  Add the expiration of the Alternative Minimum Tax (AMT) “patch” at the end of 2011 and the annual temporary tax “extenders,” such as the deduction for state sales tax, and the tax situation gets really messy.


Affordable Care Act


In 2010, Congress enacted the Patient Protection and Affordable Care Act (ACA). As a result, two new taxes will go into effect January 1, 2013. These new taxes only apply to taxpayers with AGI exceeding  $200,000 for single filers and $250,000 for married filers.


A new 3.8% Medicare tax on unearned income applies to the amount of unearned income that causes AGI to exceed the thresholds of $200,000 for single filers and $250,000 for married filers.  Unearned income includes capital gains, dividends, interest, rents, royalties, passive interest, and income from estates and trusts.

A new 0.9% Medicare surtax for wages exceeding $200,000 for single filers and $250,000 for married filers. Unlike the current 1.45% Medicare tax, the additional 0.9% only applies to wages exceeding the above levels and is uncapped.

What does this mean for your investment portfolio with Petersen Hastings?


With so much uncertainty, it is not prudent to make changes to investment portfolios unless there are unique client circumstances that warrant action.


The following are the general “unique circumstances” that should be discussed with your primary Petersen Hastings advisor.


Clients that are single filers and expect to exceed $200,000 AGI in 2013 or married filers and expect to exceed $250,000 in 2013 should review their situation with their primary Petersen Hastings advisor. In general, all clients should expect that tax rates will not be lower in 2013 than 2012 unless taxable income is lower in 2013. Possible actions  “considered” ahead of year-end may include: unique short term cash needs, ability to accelerate wages or other income subject to the 3.8% or 0.9% Medicare tax or surcharge into 2012, accelerating Roth conversions (if planning to convert in the next few years), and/or 401(k), Profit Sharing, or Defined Benefit Plan analysis.


We appreciate your trust in Petersen Hastings, and we look forward to continuing to guide you to your personal goals. It is our privilege to act as your ongoing primary fiduciary, a role that we take seriously. Our summary is intended to provide basic background on the financial fiscal cliff and the Affordable Care Act, and most importantly, to give you confidence that your interests are being prioritized during this period of financial uncertainty.