Making Cents: Several tax increases loom in 2013

John P. Napolitano

The Affordable Health Care Act, aka “Obamacare,” has been the news most read by Americans in the past week. But beyond the fact that the Supreme Court found it was not unconstitutional to levy a new tax to help pay for mandated health insurance, there are other taxes ready to be levied on Jan. 1.

An additional 3.8-percent tax will be levied on capital gains and investment income for high wage earners starting in 2013. For the same earners, there will be a 0.9-percent increase in the Medicare tax.

Flexible spending accounts will have a $2,500 cap and the threshold for the medical expense itemized deduction is going to be 10 percent of adjusted gross income.

There is concern among investors about the consequences of larger taxes on investment income and capital gains. This speculation includes thoughts that taxpayers may elect to sell appreciated assets in 2012 to lock in the lower tax rate in effect for 2012, adding downward selling pressure on your portfolio.

The second 2013 tax increase would be in the estate arena. Currently there is a $5 million dollar exemption for both gifts and estates.

Starting in January, the estate limits are set to revert to the previous $1 million level.

The problem with the scheduled estate tax increase is that many believe that the law will not regress to the limit of over 10 years ago, even though that is exactly how the law reads today. Many people simply feel that the government will pull another rabbit out of its hat and maintain the $5 million exemption. This has many holding off updating their estate plans on blind faith and crossed fingers. This is not something I would recommend, especially if your estate is substantial and taking advantage of the $5 million exemption makes good estate planning sense.

The last set of tax changes scheduled to take effect next January are from the expiring Bush-era tax cuts. These could raise the tax on dividend income from 15 percent to as high as 43.4 percent if you make more than $250,000.

Politics created these uncertainties and politics will likely determine if change. Your financial future, however, is too important to leave to politics. You may have to plan using two scenarios, but that may beat doing nothing and leaving it up to congress.

John P. Napolitano is CEO of U.S. Wealth Management in Braintree, Mass., and 2012 president of the Financial Planning Association of Massachusetts. He may be reached at