The Patient Protection and Affordable Care Act (aka health care reform) was enacted in March 2010. This is very comprehensive legislation affecting taxes, insurance, Medicare and Medicaid, among others, that will be implemented over 8 years. So what’s in store for the year 2012 under this law? Well, not much. However, the majority of significant tax changes are schedule for 2013, which creates some significant planning and preparation opportunities for 2012.
Probably the tax change in 2013 that will impact the most individuals is the change in capital gains rates. The special tax rates on long-term gains and qualified dividends will expire on December 31, 2012. In 2013, the tax rate on long-term gains is schedule to increase to 20% (or 10% if a taxpayer is in the fifteen percent tax bracket). Also in 2013, qualified dividends will no longer receive the preferential capital gains, so that all dividends will be subject to the ordinary tax rates. This creates some significant opportunities in 2012, to realize significant long-term capital gains and take advantage of the lower rates. Also, you may want to consider poising yourself to rebalance your portfolio in 2013, perhaps by changing from dividend-producing funds to more tax-efficient funds. Do the research and planning now in 2012, so you’re ready to respond to the higher rates in the new year.
Also beginning in 2013, capital gain income will be subject to an additional 3.8% Medicare tax, to the extent that adjusted gross income (AGI) exceeds $250,000 for a joint return, $200,000 for other filing statuses.
In addition, to the increases in capital gains rates, ordinary rates are scheduled to increase , with the current 33% and 35% brackets increasing to 36% and 39.6%, respectively in 2013. Also, for those earning more than $250,000 for a joint return ($200,000 for all others), there will be an additional 0.9% Medicare tax on the amounts exceeding this threshold. Again, this represents an opportunity to accelerate income, such as bonuses or commissions, if possible, into 2012. By the same token, you may want to defer certain deductions if possible into 2013, if you get more bang for your buck.
2012 also represents the last year for the American Opportunity Credit, which has been much more beneficial for more taxpayers than either the previous HOPE credit or the Lifetime Learning Credit, due to the greater dollar amount of credit than the other tuition credits, as well as a portion of the credit being refundable. Because of this you may want to consider prepaying the spring 2013 tuition in 2012 if it results in a greater credit.
On the deduction side, the threshold for the itemized deduction for qualified medical expenses increases from 7.5% to 10% in 2013, making it even more difficult for many to deduct medical expenses not covered by health insurance. Because of this you should seriously consider a Health Savings Account (HSA). You must have an HSA-compatible health insurance policy, as well as the actual HSA. See our article, What You Need to Know About HSAs for more details, as well as accelerating any elective medical procedures into 2012 if it results in a greater deduction.
Of course, all of these scheduled tax increases could be changed by Congress depending upon the outcomes of the 2012 elections, so it remains to be seen what actual results will entail. For more information on how any of these tax changes might affect you please contact us.
