It has finally happened. I hope everyone had a joyous holiday season with their families. Now that the holidays are nearly over and done with, Congress has one more gift in mind. However, it is not a surprise. In just a few days, while we are celebrating the New Year, Congress will very likely be raising taxes on every American family in the country. Now is the time to do a financial checkup for yourself, including consultation regarding your estate planning, tax, and other financial situations to ensure that you are protecting yourself as much as possible from the impact of the cliff. For example, by planning for Medi-Cal eligibility through a QMap Trust or VA Aid & Attendance Non Service Connected Disability Pension eligibility through a QVap Trust, you can help protect some of your assets from running out prematurely due to ongoing medical bills during retirement. Here is a quick rundown of some fiscal cliff changes that could affect you!
Every year around tax season, someone quips “Who is FICA and why is he taking so much of my money?” FICA includes Medicare and Social Security taxes, which ideally pay for the disbursements made from both programs. The expiration of the payroll tax cut, which happens at the end of this year, will create an immediate tax hike evident in your paychecks equal to 2% of your income. If you are working, you will see the effect of this increase immediately.
During George W. Bush’s administration, he cut tax rates across the board for all individuals, but included an automatic expiration date in the cuts. Although the expiration date has been extended in the past, whether to allow these cuts to expire has been a major sticking point in Congressional negotiations. While it seems that everyone in Congress is agreed that income tax rates should not increase for families with incomes below $250,000, no bill has been passed to protect these families from the increase. Instead, both sides are using lower and middle class families as leverage. As a result, expect another hit to your first paychecks of the year because your withholding is based on your projected tax rate.
Additionally, if you are no longer working, make sure your withholding is adjusted appropriately. If you typically make estimated tax payments, you should verify with your tax advisor that your estimated tax payments are calculated correctly in order to avoid penalties. If you normally have 10%-15% withheld from retirement distributions, you should decide whether to increase your withholding to 15-28%, which represent the new income tax rates for the first two income tax brackets!
Finally, your capital gains income, including qualified dividends, will be taxed at higher rates. For individuals with a lot of appreciated stock, you should speak with your advisors to determine how long to hold the stock in your situation. Depending on your age, financial status, and other tax factors, it may be worthwhile to hold certain assets for as much time as possible.
The income and payroll taxes will affect you immediately. However, they are part of your broader financial plan that includes your future planning. With these increased tax rates, you may need to reconsider whether you will have enough to pay your long-term care needs and sustain you throughout your retirement. Alternatively, you may need to revisit your plan to minimize both income and estate taxes.
Estate Planning: The Price of Organization, Rewards, Gifts, and Wondrous Tax Things… FREE REPORT: This complimentary report, focused on Estate Planning, is comprised of many of Mr. Miller’s articles from his long running column for the largest regional newspaper in San Diego County. This report will guide you through the questions surrounding getting your estate planning in order.