Financial Focus Joseph Ortiz

As you know, the U.S. Congress has adopted some measures to help avoid the much-feared “fiscal cliff.” At this point, important spending decisions have been put off, but new tax laws are in place — and, as an investor, you’ll want to know just how this legislation will affect you.

Let’s look at the impact of the tax laws on three different income levels:

• Up to $200,000/$250,000 — If you earn less than $200,000 (if you’re single) or $250,000 (if you’re married and file jointly), your income tax bracket will not change, nor will the tax rates assessed on dividends you receive from stocks or long-term capital gains you receive from selling investments that have appreciated in value. However, a 3.8 percent Medicare tax will apply to the lesser of your net investment income or your modified adjusted gross income.

• $250,000 to $400,000 — If your adjusted gross income is at or more than $250,000 (for single filers) or $300,000 (for married couples), your itemized deductions will begin to phase out, as will your personal exemption deductions, possibly resulting in higher effective tax rates. And the 3.8 percent Medicare tax will apply to part, or all, of your investment income. But your tax bracket stays the same, as do the tax rates on dividends and capital gains.

• $400,000 or $450,000 — If you earn at least $400,000 (if you’re single) or $450,000 (if you’re married), you will be subject to the phase-out of deductions described above. More importantly, however, your marginal tax rate will rise from 35 percent to 39.6 percent. Plus, taxes on qualified dividends and long-term capital gains will rise from 15 percent to 20 percent — or, actually, 23.8 percent, when the 3.8 percent Medicare tax is added in. Consequently, you may have some decisions to make; at a minimum, you’ll need to know how the new rates might — or might not — affect your investment choices. For example, if you rely on bonds to provide a source of income, be aware that your interest payments — taxed at your marginal tax rate — will now be taxed more heavily. As for capital gains, the slightly higher rates now give you even more incentive to be a “buy-and-hold” investor, which is usually a good strategy for most people. And the increase in dividend taxes doesn’t detract from the key benefit of dividends — namely the ability to provide a potential source of rising income that can help keep you ahead of inflation. Keep in mind that dividends can be increased, decreased or eliminated at anytime without notice.

Overall, the changes in investment-related taxes are probably less substantial than many people had anticipated. And in any case, taxes are but a single component of investment decisions — and usually not the most important one.

Still, the new tax legislation is significant, so you should consult with your financial advisor and tax professional to determine what moves, if any, you may want to make.

• This article was written by Edward Jones for use by Ahwatukee Foothills Edward Jones Financial Advisor Joseph B. Ortiz, AAMS, CRPS. Reach him at (480) 753-7664 or joseph.ortiz@edwardjones.com. Accredited Asset Management Specialist and AAMS, Chartered Retirement Plans Specialist and CRPS are registered service marks of the College for Financial Planning.

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