Market Commentary - 1/25/13: Tax time is upon us and the Debt Ceiling debate is put off

Since there has been so much conversation about tax changes, I wanted to provide you with an example of a couple changes occurring in 2013:

  • If you are a high-income household making more than $400,000 (single) or $450,000 (married filing joint), your tax bracket goes to 39.6% from 35%. If you are in this new high tax bracket, you will also be subject to a capital gains rate of 20% versus 15%, as well as the 3.8% surcharge from the Affordable Care Act.
  • Another change is that itemized deductions and personal exemptions will be phased out. The thresholds are $300,000 for married filing joint, $275,000 for head of household, and $250,000 for single. This means that if you make that kind of money, you will not be allowed to take all of your itemized deductions. Your personal exemptions – another subtraction from your income before taxes are calculated – will also be reduced.
  • Employees’ net pay is also now 2% lower as the payroll tax holiday was allowed to expire. This means the full 6.2% of Social Security will now be withheld from your pay. The wage ceiling on which Social Security is taxed has been increased to $113,700. Medicare tax is unlimited, but if you earn more than $200,000, an additional 0.9% will be withheld.
  • Congress patched the Alternative Minimum tax and adjusted it for inflation, which will keep taxes lower for the 60 million Americans that would have been affected. 


While Congress did take a scalpel to some tax deductions others were left untouched and extended through 2013:

  • Discharge of qualified principal residence exclusion. Filers going through a foreclosure or short sale who may have had loan forgiveness should look into this as it will exclude most, if not all, of the forgiven amount from taxable income.
  • Educators may continue to deduct $250 in related job expenses as an adjustment to income.
  • Mortgage insurance premiums may be deducted as mortgage interest.
  • The deduction for state and local sales taxes may still be taken.
  • The $1,000 Child Tax Credit, the enhanced Earned Income Tax Credit, and the enhanced American Opportunity Tax Credit will all be extended through 2017.
  • Tuition costs may be deducted as an adjustment to income.
  • IRA-to-charity exclusion from taxable income remains in place for 2013, including a special provision that allows transfers made in January 2013 to be treated as if made in 2012. If you're 70 1/2 or older, by doing this, you can donate from your IRA directly to a charity, and avoid including this IRA withdrawal as taxable income. This can be helpful in allowing you to position yourself in such a way that your social security benefits are not taxable.
  • Beginning on Jan. 1, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be 56.5 cents per mile for business miles driven, 24 cents per mile driven for medical or moving purposes, and 14 cents per mile driven in service of charitable organizations. 


Debt Ceiling Debate

The House of Representatives passed a short-term extension of the federal borrowing authority and the Senate is expected to follow suit this week. The "debt ceiling" crisis has been averted for a couple of months, and as a result, the U.S. and overseas stocks markets has responded positively.

That being said, all Congress has done is just delay the debate or budget battle for two or three months. Bottom line, U.S. and overseas investors, business owners, other world leaders and most importantly, U.S. citizens, want some sort of permanent and practical solution to the U.S. Government's finances. As such, if some practical resolution is not being discussed by the next deadline, then it is possible we will see the market temporarily correct/decline, until something permanent is agreed upon. For now, I believe just sitting tight is the best strategy.


“To be happy, drop the words if only and substitute instead the words next time."   

          Smiley Blanton

"We crucify ourselves between two thieves: regret for yesterday and fear of tomorrow."

          Fulton Oursler

"Patience is the ability to put up with people you'd like to put down."

          Ulrike Ruffert


Tony Moeller, CPA


The information listed in this commentary is a compilation of various publicly available sources and is for informational purposes only.  It is not a recommendation or solicitation of any particular investment or strategy.  A risk of loss is involved with investments in the stock and bond markets.


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