Fiscal Cliff Tax Changes

The ‘fiscal cliff’ brought us a last minute tax law that most investors seem pleased with. During the month of January Sycamore’s Growth and Income composite gained nearly 6%. Your portfolio likely performed about as well. Of course we’re all fully aware that this pace will not continue but it’s a wonderful start for what we feel could be a solid year for share prices. Though the markets have advanced over the last one and twelve months, most of the companies we follow have increased earnings and dividends during that same period so we are still finding many good values.

Turning to the new tax law, just how is it likely to affect you and your investment portfolio(s)?

Income Tax Changes

The top income tax rate for individuals with earned income of over $400,000 and joint filers with income of more than $450,000 will increase from 35% to 39.6%. Additionally these high income taxpayers will see the tax rate on their long term capital gains and qualified dividends raise from 15% to 20%. If you are a single filer earning less than $400,000 or a joint filer earning less than $450,000 these increases will not affect you.

Medicare Tax on Investment Income

Beginning in 2013 there will be an Medicare tax of 3.8 % applied to your ‘net investment income’ if your adjusted gross income exceeds $200,000 for a single filers and $250,000 for joint filers. ‘Net investment income’ includes interest, dividends, royalties, rent, gross income from passive activities, taxable distributions from deferred annuities, and net gain from the sale of stock. This new tax will not apply to distributions from tax deferred retirement accounts such as Ira’s or 401(k) plans. Also, it will not apply to municipal bond interest.

Estate Tax Changes

Here the news is wonderful as the ‘per person’ estate gift tax exemption of $5,100,200 that we had in 2012 has been made permanent. Going forward this amount will be indexed to inflation so for 2013 the exemption amount per individual will be approximately $5,250,000. More good news came in this law when the portability of this exemption between spouses has also been made permanent. This means that if one spouse does not use their $5,250,000 exemption the surviving spouse can add that to their own exemption and allow the couple a total exemption of $10,500,000 for the family. Of course there are still many good reasons to have an estate plan as the maximum estate tax rate has now been raised from 35% to 40%. On balance, we feel that the estate tax provisions in the new tax law will be beneficial for most of us.

Retirement Accounts

If you’re over 70 1/2, are subject to minimum distributions from your IRA or other qualified account(s) and have a charitable streak you will appreciate learning that you can once again make text free distributions from directly from your ‘qualified’ account to charities. The maximum amount you can contribute for any single tax year is $100,000. This provision has been extended only through 2013.

What effect will the new law have on your investment portfolio?

As we look back at previous tax law changes and their effect on share prices, we think the current changes are not significant from an investment perspective. It certainly has not caused us to change our focus or direction when selecting investments for your portfolio(s). In fact, if the performance of the stock market so far this year is an indicator, the law seems to have had at least a short term positive effect. It can be difficult to make the changes needed but if our federal balance sheet where to be balanced and our national debt reduced or eliminated, we think the long term benefit to our economy could be significant and hopefully we would all share through a higher standard of living. It’s likely that more tax changes are on the horizon…stand by.

As always, if you have any questions or comments, please let us know.


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