President Barack Obama has been elected to lead the country for another four years. As a result, many Americans are wondering what another term will mean for their finances. Meanwhile, a number of tax increases are beginning this year, so I think it's important you have a plan in place to protect yourself from paying too much — now and in the future.
As part of Obama's Affordable Care Act, two new taxes are set to go into effect in 2013 that will be used to help pay for Medicare. The first is a 0.9 percent tax on earned income over $200,000, and the second is a 3.8 percent tax on investment income over $200,000.
Other tax increases are taking place as a result of "fiscal cliff" negotiations. The income tax rate for those making $400,000 or more will increase from 35 percent to 39.6 percent for income above that threshold. Capital gains and qualified dividends are also seeing a tax hike from the fiscal cliff, from a high of 15 percent to 20 percent. This could especially hurt retirees, as they are typically conservative investors who tend to take dividends for income in retirement.
While all of the above tax increases are focused on higher income earners and investors, there is one tax increase that will affect almost everyone. This is the increase in employee Social Security taxes, known as payroll taxes, from 4.2 percent to 6.2 percent. This tax is currently only on the first $110,000 of income, but the president has considered increasing the cap to $250,000.
While taxes afford us many important government services, overpaying taxes is not necessary. Countable income determines your income tax rate, so do yourself the service of keeping your countable income down by investing in your future through tax-deferred accounts such as retirement plans or fixed annuities. The tax benefits of these investments may change, so be sure to consult with a qualified adviser if interested in pursing this investment strategy.
When investing in equities, don’t forget that you can carry your capital losses forward by $3,000 per year as well, which can help take some of the bite out of the rising capital gains tax rates.
A professional might be able to help you by evaluating your financial situation in its entirety and structure your assets so that your tax liabilities are minimized. Making wise financial decisions isn’t just something you should do when higher taxes heading your way, in my opinion. By taking steps to effectively manage your finances now, I think you can save yourself a lot of worry if the unexpected happens in the future.