Post Election Income Tax Planning for Divorce

By Justin A. Reckers CFP®, CDFA™, AIF®

We now have a bit more clarity about the future income tax landscape in the United States and the State of California specifically. Here is what I know.

In 2013 the 0.9% Medicare surtax kicks in on taxable income over $200K for single filers and $250K for married filers.

In 2013 the 3.9% Medicare tax on unearned income such as dividends, interest and capital gains kicks in for single filers with taxable income over $200,000 for single filers and $250,000 for married filers.

President Barack Obama wants the top rate on capital gains to rise to 20% for single filers with taxable income over $200,000 for single filers and $250,000 for married filers. He also wants the top tax rate to go higher from its current 35%.

What does this mean to you? It may be a good idea to sell appreciated assets in 2012. Taking gains in these assets in 2012 could save you the 0.9% Medicare surtax, the 3.9% Medicare tax on unearned income and 5% or more from the increase in capital gains tax rates.

For divorcing parties this might mean selling some appreciated assets such as stock positions or real estate in order to lock in the 15% capital gains rate and avoid the 3.9% additional Medicare tax rather than retaining them post divorce. It might mean exercising non-qualified stock options in 2012 to lock in the maximum 35% income tax bracket and avoid the additional 0.9% Medicare surtax.

California voters passed Proposition 30 on November 6. Prop 30 raises taxes on EVERYONE.

• The income tax increases are RETROACTIVE to January 1, 2012
• Sales tax rates are increased by 3.45%
• Three new high-income tax brackets are created: raising rates from 9.3% to 10.3% for taxable income over $250,000 but below $300,000 (10.6% increase); from 9.3% to 11.3% for taxable income over $300,000 but below $500,000 (21.5% increase); from 9.3% to 12.3% for taxable income over $500,000 but below $1 million (32.26% increase); and from 10.3% to 13.3% on taxable income over $1 million (29.13% increase).

There is nothing you can do about Prop 30 at this point since the changes are all RETROACTIVE. It amazes me how many people did not realize the measure was retroactive.