Key Tax Changes for 2012 – and Beyond

By on November 23, 2012

Courtesy of: Irene F. Stolarz, First Vice President Financial Advisor
Branch Name: Morgan Stanley Little Falls, NJ
Phone Number: 973-890-3020
Web Address: http://fa.smithbarney.com/stolarz

Although no major tax changes are scheduled to take effect until 2013, when many of the tax breaks enacted since 2001 will expire, there are several changes for 2012 you’ll want to be aware of as you plan your tax strategies for the coming year.  

This is shaping up to be a pivotal year for American taxpayers, as many key tax breaks enacted over the past decade are scheduled to come off the books at the end of 2012. You may want to start planning ahead now to focus on the changes planned for 2013—and what you can do to take advantage of current tax breaks before they expire.

Ordinary Income
Existing tax rates on ordinary income, which range from 10% to a maximum of 35%, are unchanged in 2012. Next year, however, rate brackets will revert to those in place before 2001, which ran as high as 39.6%, unless Congress elects to extend current rates.

• Capital Gains
The top tax rate on long-term capital gains (profits on investments held more than one year) is set to rise after December 31, from 15% to 20%. The capital gains tax is zero (subject to income limitations) in 2012 for investors in the 10% and 15% ordinary income marginal tax brackets, but it is slated to resume in 2013 for those individuals. Planning tip: It may make sense to lock in capital gains in 2012 at the lower rates, or to postpone capital losses until 2013, when they will be worth more if used to offset gains.

• Dividends
The top tax rate on qualified dividends remains at 15% in 2012. However, this special rate is scheduled to go away in 2013, and dividends will again be taxed as ordinary income—at a top rate of 39.6%.

• AMT Exemption
The federal alternative minimum tax (AMT) rules permit an exemption from the AMT, which has been raised annually in recent years. But as the law currently stands, all previous adjustments to that AMT exemption were eliminated. Thus, for income earned in 2012, the applicable AMT exemption will drop from $74,450 to $45,000 for joint filers and from $48,450 to $33,750 for single filers unless Congress raises them. That said, Congress has raised the AMT exemption retroactively in past years and has the power do so again for 2012. Those exemptions have typically been increased during the tax year they were effective, and Congress has waited until as late as December to pass the increase.

• Retirement Accounts
The maximum allowable pre-tax contribution to employer-sponsored retirement plans, including 401(k) and 403(b) plans, increased to $17,000 in 2012 from $16,500 in 2011. Contribution limits for IRAs, on the other hand, are unchanged this year. But the Roth IRA income phase-out range increased, meaning more high-income filers may be eligible to use these accounts. For married couples filing jointly, the contribution phase-out range increased to between $173,000 and $183,000. For single filers, the range is now between $110,000 and $125,000.

• Estate Tax
The estate tax exemption for 2012 rose to $5.12 million ($10.24 million for couples), from $5 million in 2011. But that exemption is scheduled to drop to $1 million in 2013 and the estate tax rate is set to jump from 35% to 55%. Planning tip: Now may be an ideal time to begin looking for ways to reduce the value of your taxable estate, such as by placing assets in trusts or by gifting them to individuals.

There’s no telling if Congress will elect to extend all, some or none of the expiring breaks before year-end. So it’s wise to plan ahead. Let me help you identify the right tax strategies for your needs in 2012 and beyond.

If you’d like to learn more, please contact Irene F. Stolarz This information is not intended to be tax advice and should not be treated as such. Each individual’s tax situation is different. You should contact your tax professional to discuss your personal situation. Morgan Stanley and its Financial Advisors do not provide tax or legal advice, are not “fiduciaries”( under ERISA, the Internal Revenue Code or otherwise) with respect to the services or activities described herein, and this material was not intended or written to be used for the purpose of avoiding tax penalties that may be imposed on the taxpayer. Individuals should consult their personal tax and legal advisors before making any tax or legal related decisions. Article by McGraw Hill and provided courtesy of Morgan Stanley Financial Advisor. The author(s) are not employees of Morgan Stanley Smith Barney LLC (“MSSB”). The opinions expressed by the authors are solely their own and do not necessarily reflect those of MSSB. The information and data in the article or publication has been obtained from sources outside of MSSB and MSSB makes no representations or guarantees as to the accuracy or completeness of information or data from sources outside of MSSB. Neither the information provided nor any opinion expressed constitutes a solicitation by MSSB with respect to the purchase or sale of any security, investment, strategy or product that may be mentioned. Morgan Stanley Financial Advisor(s) engaged The Post Eagle to feature this article. Irene F. Stolarz may only transact business in states where she is registered or excluded or exempted from registration http://fa.smithbarney.com/stolarz Transacting business, follow-up and individualized responses involving either effecting or attempting to effect transactions in securities, or the rendering of personalized investment advice for compensation, will not be made to persons in states where Irene F. Stolarz is not registered or excluded or exempt from registration. Investments and services offered through Morgan Stanley Smith Barney LLC, member SIPC. CRC 479592 4/12