Judy Loy: What's New for 2013 that will Affect Your Pocketbook
The Fiscal Cliff (anyone tired of that moniker yet?) was averted at the 11th hour, and many changes take effect in 2013 with more to come in two months. Let’s explore some of the major shifts in contribution limits, gifting and so on that will affect everyone’s pocketbook in this New Year.
The stock market celebrated cliff avoidance with a major surge on the first trading day of the year. There is good news if it continues. When the Standard & Poor’s 500 Index gains in the first five days of the year, the S & P historically has a full-year gain 84.6 percent of the time, according to Stock Trader’s Almanac 2013. I know I’m not alone in hoping we wake up on Jan. 9 with a positive stock market for the year-to-date. It will be good because the tax on long term capital gains and dividends, which previously had been rumored to rise as high as 39.6 percent, is capped at 20 percent. Further, it only rose for those making $400,000 as an individual and $450,000 as a couple. Note: Those individuals making more than $200,000 or couples earning over $250,000 will see an additional tax of 3.8 percent as part of the Affordable Care Act (AKA Obamacare).
One downside for those who earn a salary is the reversion of the Social Security payroll tax back to 6.2 percent from 4.2 percent. For the past two years, a ‘payroll tax holiday’ lowered the rate by 2 percent but that was permitted to lapse under the plan. As an example, an American earning the median national salary of $50,000 will see a reduction of $83 on their monthly paycheck. This increase will hurt those with less disposable income (read: minimum wage and low income) the most.
The hardest hit demographic was the richest as defined by income. Individuals making $400,000 and married couples making $450,000 will have their income tax rate increased from 35 percent to 39.6 percent. The rumored $200,000 and $250,000 benchmarks were held off by the force of the GOP.
Congress did finally correct the Alternative Minimum Tax (AMT) patch that had to be reinstated each year. It’s about time. AMT was passed in 1969 to make sure millionaires were paying their fair share, and periodically since then, Congress would ‘patch’ or move up the amount so it only applied to high-end earners. The government finally permanently set the AMT to adjust for inflation, thus saving middle class Americans a bundle come tax-wise in 2013.
What are some ways to save on taxes? Contributing to a retirement plan is the most direct. Employee contribution limits rose for 2013. A 401k or similar plan permits a worker to put away as much as $17,500 (increased from 2012’s $17,000). Those over age 50 can contribute $5,500 more on top of that amount. This is a great way to reduce taxes and save for your future. A Simple IRA, which is a retirement plan for businesses with less than 100 employees, raised the employee deferral limit to $12,000 from $11,500 in 2013. Finally, those saving in individual retirement accounts such as a Traditional IRA or a Roth can put another $500 in this year, taking contribution limits from $5,000 to $5,500 and raising the limit for those age 50 and over to $6,500.
Another benefit was an increase in the gift tax inclusion. The dollar amount that an individual could gift to someone tax-free rose from $13,000 in 2012 to $14,000 in 2013. This means a grandfather and grandmother can now collectively gift $28,000 to a grandchild without tax consequences.
Something unlikely to change in 2013 is the low interest rate environment. The Federal Reserve has indicated it would keep rates at zero until unemployment falls to 6.5 percent or until inflation is on track to exceed 2.5 percent. The unemployment rate currently sits at 7.7 percent. This means there is still time to refinance your mortgage or buy a new home at all-time low rates but investing in CDs, savings and money markets won’t get you too far.
All in all, 2013 started out with a bang for the markets and a fizzle for the Fiscal Cliff. Let’s hope that the rest of the year has everyone in Centre County happy and healthy.