Tax Changes in 2013

I attended a brief continuing education presentation last week about some of the current developments in taxation. Most of the changes involve the expiration of the so-called Bush tax cuts. Without action by Congress prior to the end of 2012, there will be significant changes to individual taxes in 2013.
Tax rates
Individual tax rates will top out at 39.6% instead of the current top rate of 35%. In addition, we will lose the 10% tax bracket; the 10% bracket will be replaced by a 15% tax rate. What does that mean for your tax bill? There is a great interactive tool to help you evaluate the changes in your tax liability at http://interactive.taxfoundation.org/taxcalc/#calculator
Investment changes
Without action by Congress, capital gains rates will increase from 15% to 20%, a 33% increase. Dividends will be taxed at a maximum of 39.6% and will lose their favored 15% tax rate.
Other individual changes
The child tax credit, available for families with children under the age of 17, is scheduled to decrease from $1,000 to $500 per qualifying child. The American Opportunity Tax Credit (AOTC) is due to expire at the end of 2102. The AOTC applies to qualified tuition and related expenses and results in a total credit of up to $2,500 per student. The $2,000 annual contribution limit for Coverdell education savings accounts is set to revert back to $500 per year. The deduction for student loan interest has been enhanced in the past few years to allow a deduction of $2,500 per year for interest paid over the life of the loan. If Congress does not act, a taxpayer will be allowed a deduction for student loan interest only for the first five years of the loan.
In addition, remember the phase out for itemized deductions? It will be reinstated in 2013 for those individuals with adjusted gross income of $175,000 (approximately) or more. For example, if your adjusted gross income is $190,000 in 2012 and you have total itemized deductions of $20,000, your taxable income will be $170,000 before exemptions and other deductions. In 2013, assuming the same adjusted gross income and itemized deductions, you will only be entitled to $19,550 in itemized deductions, resulting in taxable income of $170,450. Exemptions will be subject to a similar phase out requirement, reducing the benefit of personal exemptions for high income taxpayers.
Suggestions
What are some tax planning strategies taxpayers can do before the end of the year to reduce their exposure to increased taxes in 2013?
1. Consider accelerating your charitable donations and property tax payments so they are paid prior to 12/31/12.
2. Convert traditional IRAs to Roth IRAs. While you must pay the tax on the conversion, tax rates are particularly favorable in 2012.
3. Consider selling appreciated capital assets, such as stocks, prior to the end of 2012 to take advantage of the lower capital gains rates.

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