How to Approach Tax Planning for 2013

So the new tax law doesn’t seem too burdensome. But watch out as the increase in 2013 will surprise you. Those small changes in taxes can add up to be a big fat tax increase.

Last month, I mentioned you could figure out the impact of the proposed tax changes through the interactive tax calculator sponsored by the Tax Policy Center, a nonpartisan group in Washington. Now that the legislation has passed, it may be worthwhile to revisit this calculator as it is updated with the new tax law. You may be surprised as how these small incremental changes add up.

For example, a single person making $354,000 annually with no children will pay an additional $7,000 in federal 2013 taxes versus 2012, when you factor in typical dividend income and capital gains, then account for deductions such as real estate taxes, mortgage and charitable contributions.

A married couple with no children that earn $415,000 a year will pay an additional $20,800 in federal taxes. The amount was calculated using the Tax Policy Center’s calculator and factoring in capital gains and dividends as well as deductions for taxes, mortgage interest and charitable contributions. The amounts are typical for individuals in this income category per the Tax Policy Center.

It’s easy to calculate the American Taxpayer Relief Act’s impact by using the Tax Policy Center calculator, particularly at this time of year, when you are collecting your information for filing taxes. It is important to do this now, as there are steps you can take to minimize the impact of these increases for the 2013 tax year. Come December, it will be a lot harder to minimize its impact.

Here are a few strategies that you should consider:

If you have both taxable and nontaxable (traditional IRA and retirement plans) accounts, divide your investments so that your income-producing accounts, such as fixed-income and interest-income-producing assets are held in your tax-exempt account. Also include investments that may not be sold within 12 months, you don’t want to be in a situation where you’ll be paying short-term capital gains.

Your taxable accounts will ideally include long-term holdings that benefit most from capital appreciation, such as stocks. Presently, the federal government continues to tax dividend-paying stocks at a low 15 percent rate. However, if your income is at the $200,000 (single) and $250,000 (married) thresholds, the federal government tax rate on divided income increases to 18.8 percent. Add in Illinois state tax at 5 percent, and you are looking at 23.8 percent tax. So if you are in the upper income brackets, and there is any room left, consider including dividend stocks in your tax-deferred and/or Roth IRA.

Also, consider managing your deductions carefully. When you look at Schedule A Itemized Deductions, these deductions will be reduced for taxpayers with adjusted gross incomes of $300,000 (married) and $250,000 (individuals). Those deductions you took for granted on charitable contributions, state and local taxes, medical expenses and mortgage interest, to name a few, will be reduced.

It’s hard to navigate all the changes and the ultimate impact on your situation, but for the money saved, it is most likely worth the effort. This is a time where your accountant or financial advisor can help.

Disclaimer: The views expressed in this article are the opinions of the author and should not be interpreted as individualized investment advice. Investment objectives, risk tolerances and the financial situation of individual investors may vary. Please consult your financial and tax advisors before investing.

Susan Carr-Templeton

About Susan Carr-Templeton

Susan Templeton is the founder of Stafford Wells Advisors, a wealth management firm serving individuals, families and businesses and advising workplace retirement plans. Stafford Wells was founded in 2008 with the mission of delivering independent, complete, unbiased investment and planning advice, free of any conflicts of interest. Susan Templeton has more than 20 years experience in investment management. She received her B.S.B.A. degree in marketing from the University of Denver and her M.B.A. from the University of Chicago. Susan is a trustee for the Advocate Foundation where she chair’s the Planned Giving Committee and is a member of the Investment Committee. Susan serves on the investment committee for the Visiting Nurse Association (Chicago) and is a former trustee of the Village of Oak Brook Police Pension Plan.