BOSTON (MarketWatch) — It’s not as if you need to make immediate changes to your financial plan now that President Barack Obama has proposed a fiscal 2013 budget. But you sure as heck should know the specifics of that proposal and plan now to make some money moves should some or all of those proposals become the law of the land.Here are some of the key pieces of Obama’s budget proposal and what moves you might consider.
Higher tax rates — for some
Obama proposed to extend the Bush-era tax cuts for all but the top two brackets.
“The only change would be to have the 33% and 35% rates go back to their pre-2001 levels of 36% and 39.6%,” said Robert Keebler, CPA, of Keebler & Associates.
“Taxpayers in the top two marginal brackets would still benefit from reduced rates on the portion of their income taxed in the lower brackets,” he said.
So, what might you do if you are a high-income taxpayer? “Between now and the end of the year, people should look at whether they can do a Roth IRA conversion,” said Keebler. “How do you bring ordinary income into 2012?”
You might also consider selling your fixed-income securities in 2012 and then buying those bonds back in 2013. This would also qualify as a way of bringing interest income into 2012. And, consider buying cash-value life insurance, Keebler suggested.
Capital gains
Proposed: Raise the long-term capital-gains rate to 20% for some taxpayers: single taxpayers making more than $200,000 per year, $250,000 for married taxpayers filing jointly and $125,000 for married taxpayers filing separately.
Keebler suggests harvesting capital gains, not losses, in 2012. In other words, sell your winners. If the long-term capital-gains rate is raised in 2013, you’d want to have those capital gains taxed at the lower 2012 rate. “That will be really, really powerful,” he said.
Bruce Steiner, a lawyer with Kleinberg, Kaplan, Wolff & Cohen, agreed with this strategy, but also issued a caution. “If the top tax rate on long-term capital gains is increased from 15% to 20% beginning in 2013, some taxpayers may wish to consider accelerating sales to 2012 to take advantage of the 15% capital-gains tax rate,” Steiner wrote in a recent issue of the LISI Income Tax Planning Newsletter.
“This may provide a benefit in the case of sales that would have occurred soon thereafter. However, in the case of appreciated property that the taxpayer was not planning to sell in the near future, the benefit of the 15% tax rate may be outweighed by the cost of accelerating the tax and giving up the potential for a basis step-up by holding the asset until death.”
Qualified dividends
Proposed: Let the tax rate on qualified dividends revert to ordinary income tax rates (up to 39.6%) for the same taxpayers. For everyone else, the rate would stay at 15% (or 0%).
If you are among those taxpayers who have been depending on this tax break to fund your living expenses, it might be time look for ways to reduce your standard of living.
“Those people have to figure out what to do,” Keebler said. “Many are living high on the hog with this qualified dividend at current rates, for 10 years. And now it's gone, like a hurricane took it away.”
“Consider, no matter whether you are wealthy or poor, if you get a tax break you spend it. Some will save it. But a lot of people have built this into their standard of living,” he said.
Losing this tax break could come as a shock to your budget.
Steiner also offered this guidance: “If dividends are taxable as ordinary income for upper-income taxpayers, these taxpayers should review their asset location.”
“At a 15% tax rate on qualified dividends, IRA owners often owned dividend-paying stocks in their taxable accounts, and taxable bonds in their IRAs,” Steiner wrote. “If dividends are taxable as ordinary income, they may want to consider owning dividend-paying stocks in their IRAs and tax-exempt bonds in their taxable accounts.”
Deductions for charitable contributions
Proposed: Reduce the value of itemized deductions for taxpayers in the 33% and 35% brackets to 28% (in 2012, the 33% bracket starts at $178,650 for single taxpayers and $217,450 for married filing jointly).
If you are inclined to make charitable gifts, 2012 would be the year to do it, Keebler said.
“A lot of very large charitable gifts should probably be made this year because [if and when the proposal goes into effect] they would be limited to only 28%,” Keebler said.
Higher-income taxpayers may want to delay their giving decisions until later this year, when more may be known about this tax-law change.
In addition, losing the value of itemized deductions will put a dent in your standard of living, he said.
Personal exemptions
Proposed: Reinstate the personal-exemption phase-out for upper-income taxpayers.
According to Keebler, this means that you might consider reducing your income, if possible. Learn more about phase-outs at this Tax Policy Center website.
Payroll taxes
Proposed: Extend reduction of Social Security tax on self-employed from 14.2% to 12.2% for the rest of 2012.
In the short-term, this extension gives you more spending money or perhaps more money to save for retirement in your own account. But it might not help Social Security in the long run, Keebler said.
College tuition tax breaks
Proposed: Make the expanded Hope tax credit, also known as the American Opportunity tax credit, permanent.
The credit is worth up to $2,500 per year for qualified education expenses.
“With regard to the Hope credit, which technically doesn’t exist in 2012, you would max out the credit by paying the first $2,000 out of pocket — this would cause a $2,000 American Opportunity credit,” said Stephen J. Bigge, CPA, of Keebler & Associates LLP.
“The next $2,000 paid out of pocket would only produce a $500 American Opportunity credit.” Learn more about the Hope credit at this IRS page.
Retirement-plan distributions
Proposed: Exempt retirement-plan participants and IRA owners from having to take distributions if the aggregate value of their qualified plan and IRA benefits does not exceed $75,000.
“Exempting participants and IRA owners with benefits under $75,000 from having to take required distributions will provide these individuals with one of the major benefits of the Roth conversion without having to convert to a Roth IRA,” Steiner wrote.
IRA rollovers for beneficiaries
Proposed: Allow nonspouse beneficiaries of IRAs or other qualified-plan assets to do rollovers.
Right now, a participant, IRA owner or spouse can take distributions of qualified plan or IRA benefits and roll them over into another qualified plan or IRA within 60 days. However, a beneficiary other than a spouse cannot do so other than by direct trustee-to-trustee transfer, Steiner wrote.
According to Steiner’s report: “Limiting 60-day rollovers to participants, IRA owners and spouses is a trap for the unwary,” he said. “Nonspouse beneficiaries sometimes collect retirement benefits payable to them, either thinking they have 60 days to roll them over into an inherited IRA, or not realizing that they can set up inherited IRAs. Allowing nonspouse beneficiaries 60 days to roll over qualified plan or IRA distributions will eliminate this trap.”
Proposals are just that
There’s no guarantee that any of these proposals will become a reality. “But you absolutely have to face them,” Keebler said.
“Most people believe that nothing is going to happen until after the election,” he said. “There’s almost no scenario where people come together and make all this happen. But maybe there is.”
Others agree. The Obama administration’s revenue proposals are not law, nor even a bill.
“However, these revenue proposals are worth watching,” Steiner wrote. “Some of them may be enacted soon. Some of them may be enacted eventually. Some of them may never be enacted.”
Bottom line for now: Talk to your estate-planning lawyer and accountant sooner rather than later. You’ll need as much time as possible to re-jigger your financial plan should any of Obama’s proposals become a reality.
“You have to start now,” Keebler said. “There’s going to be a lot of work toward the end of this year, no doubt.”
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