Now that the election is over, many Americans are wondering what their taxes will look like during the next four years. A number of tax increases are under consideration that could affect you.
While paying taxes affords us all that is great about this country, there is no need to overpay your taxes. Protect yourself from the possibility of higher taxes by staying informed and being prepared.
Some changes to the tax code were made during President Barack Obama's first term that will come into effect in January. They amount to two Medicare taxes: a 0.9 percent tax on income from work over $200,000, and a 3.8 percent tax on investments over $200,000.
New tax increases are being debated as part of the "fiscal cliff" deal. Some politicians want to raise the top two income tax brackets from 33 and 35 percent to 36 and 39.6 percent, respectively. On the table is an increase in long-term capital gains rates as well, from 15 percent to a high of 20 percent, and for the qualified dividend rate, an increase from 15 percent to a high of 39.6 percent is up for consideration. This could especially hurt retirees and conservative investors who tend to take dividends, as they will be taxed as regular income.
Not all of these tax increases are for the wealthy, though: another possible increase is in employee Social Security taxes, known as payroll taxes, from 4.2 percent to 6.2 percent. Currently this tax is only on the first $110,000 of income, but the president has considered increasing the cap to $250,000.
What can you do to minimize your tax obligations? Consider the following steps to help you prepare for possible tax increases and get on track to staying financially secure in 2013 and beyond.
First, even though Social Security taxes are increasing, Social Security as a program will still need major reform to stay solvent. Try thinking about Social Security as a supplement to your retirement savings instead of a replacement. Saving with a retirement account is highly recommended, and be sure to max out contributions to those accounts each year if possible. Building your own retirement nest egg can spare you a lot of worry about the longevity of Social Security.
Second, if you're planning to retire during the next four years, consider converting your traditional IRA or 401(k) to a Roth. Roth assets are after-tax, and generate tax-free income. By doing this before year's end, you can lock in 2012 tax rates for the conversion before increases take place.
Finally, lock in your long-term capital gains by year's end by selling appreciated equities. While you can still repurchase it again next year, this will help to ensure you pay taxes at today's 15 percent rather than what will likely be tomorrow's income tax rate.
A professional can help you evaluate your financial situation in its entirety and help you structure your assets so that your tax liabilities are minimized. While taxes afford us many important government services, overpaying in taxes is not necessary.
Remember, everyone's financial situation is different, so there may be other actions you can take now before tax hikes are implemented. Taking steps to manage your taxes now could save you significantly during the next four years.
CHRISTOPHER SCALESE, financial adviser and author of the book "Retirement is a Marathon, Not a Sprint," is president of Fortune Financial Group. Visit www.fortune-finan cial.org. Would you like to write for IN THIS CORNER? Contact us at business@times shamrock.com