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2013 Tax Reform, their Impact on Individual Incomes, and What You Can Do About It PDF Print E-mail

 

From the plethora of commercials on “How to Become Tax Free” to our Government's uncanny ability to create laws that are either unclear or even contradictory; we're going to provide some much needed insight on the current tax reform situation and what you can do to position your portfolio best.

 

Tax Free
There has been much in the news about "tax free investments" or "to be tax free."  If it sounds too good to be true, then it probably is.  There are very few investments that are "tax free."  Those that can claim to be tax-free are often associated with greater risks, higher fees, or require one to give up significant potential gains for a small fixed rate of return.  At Couture Financial, we believe an active asset management strategy is a much better choice. 

 

Tax Truth
Claims that taxes would not be raised on lower income individuals were obviously not true.  Taxes for everyone earning income automatically increased on January 1 with the reinstatement of the additional 2% on FICA tax.

The two new taxes mentioned below, the Long Term Capital Gain Tax and the Medicare Surtax will have the net effect of taking those who are in the top tax bracket (now 39.6%) to a total maximum tax bracket of 44.3% (39.6+3.8+0.9).

There is a misconception out there that these individuals in the top tax bracket are exceedingly wealthy, but this is often not as accurate as it may seem.  Take for example small business owners, who make up the majority of job creators in the U.S.  The new tax rates will adversely affect everyone whose businesses are set up where their earnings flow through to their individual income tax returns.  According to a NY Times article on Jan. 12, 2013, this will affect more than "half of all companies today." (click here for the NY Times article)

 

Long Term Capital Gain Tax
Our position at Couture Financial is that these additional changes in tax reform have hit the investment community hard.  The most important tax increase has occurred for those in the 25% tax bracket and above, who will see an increase to 20% on the long-term capital gain income.

 

Medicare Surtax
The new Medicare surtax, which comes from the affordable care act (also known as Obama care), will add an additional 3.8% tax on all investment type income and gains starting at Annual Gross Income of $200,000 ($250,000 for those filing jointly).  In addition, there is a 0.9% increase in the Medicare tax on wages.


Portability Provision Set to Stay at $5M
Not all the news is bad.  The federal estate and gift tax exemption is now set to stay at 5 million and will be adjusted annually for inflation, starting from January 1 of 2011.  This makes the exemption for this year 2013, $5,250,000 per person.  The Portability Provision not only applies to the inheritance tax, but also for gift taxes and generation-skipping taxes as well.

 

For example, say a husband and a wife have a $4 million total estate.  One spouse dies, using up $2 million of the exemption. The surviving spouse can claim the remaining exemption, which for 2013 is $3,250,000.  That would allow the surviving spouse to take that additional exemption added to their own, which this year would be an additional $5,250,000, providing a total exemption of $8,500,000 for 2013.  In order to actually receive the additional exemption, the estate tax return would need to be filed “timely" (within nine months of death), plus an additional extension of six months if properly applied for.  One caveat, if the surviving spouse should remarry prior to using the additional exemption for gifting, the previous deceased spouse’s remaining exemption would be lost.


What You Can Do About the New 2013 Tax Reforms
Seek good council.  Couture Financial recommends careful review of how these tax law changes may affect your overall financial planning.  Changes in your current and long-term strategy may be appropriate.  However, a word of caution is deserved for management of your investable assets.  Too much focus on tax law when making investment decisions can be detrimental to your portfolio.

 

We focus on what they call active asset management.  Couture Financial’ s Active Asset Management Strategy is about effectively managing wealth during bear markets to reduce the potential for loss and to minimize risk while providing the potential for significant wealth accumulation during bull markets.  Couture Financial’s active asset management programs have achieved excellent risk-adjusted performance over the years with substantially less risk in the portfolio.

 

We look forward to having the opportunity to speak with you about your investment strategy.  Also we’d love the opportunity to provide you with our complimentary monthly market updates newsletter; you can click here to join.

 

 

 



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3293 Fruitville Road, Suite 108 | Sarasota, FL 34237-6453 | Phone: 941.366.3551 | Toll-free: 800.553.3385




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