The past few years haven’t been great for those who have just retired or are nearing their golden years. And unfortunately with the fiscal cliff on the horizon — more than $600 billion in spending cuts and tax increases coming January 2 — things could get a lot worse. Lawyer and certified public accountant Leon LaBrecque predicts in a Bankrate analysis that retirees could face a 17 percent increase in their 2013 federal income taxes, in addition to increases in state, local and property taxes. And if the nation slips into another recession, they’ll see a significant dent in their portfolios.
Capital Gains and Stock Dividends
Many retirees depend on income from capital gains and stock dividends. Both taxes are slated to take a hefty hike if the Bush-era tax cuts aren’t extended. “There are a lot of people with fixed incomes that require their dividend income to live off,” says Jeff Manley, an attorney and shareholder with Greenberg Traurig LLP.
Long-term capital gains — the tax paid on the difference between the price of an asset when it’s sold and its original cost, would rise from 15 percent to 20 percent, or 23.8 percent for high-income taxpayers, which includes a 3.8 percent tax on net investments that’s part of the Affordable Care Act. The tax hike is even heftier for stock dividends: Rates would soar from 15 percent to a maximum of 39.6 percent, or 43.4 for the wealthiest Americans. That’s because qualified dividends would be taxed at the same rates as ordinary income in 2013.
“If capital gains go up next year, then you might want to take your gains this year if you have the financial wherewithal to do so,” says Patricia Soldano, western region chairman for GenSpring Family Offices. Conversely, investors who know they are going to be selling assets at a loss may want to save them for next year.
Markets don’t like uncertainty, and this stalemate is no exception. If the stock market gets spooked by the fiscal cliff debate as negotiations drag on, all investors, including seniors, could lose money. “The markets are more worried about the consequences (of going over the cliff) and throwing the economy into a recession,” said Howard Gleckman, the editor of the TaxVox blog at the Tax Policy Center.
The risk would be greatest for baby boomers and seniors who are depending on assets in their 401(k) plans to retire. A drop in 401(k) assets means less income for retirement. And since income taxes are slated to rise, those who have IRA accounts could pay more taxes on the money they take out next year. One option for seniors is to convert their IRA account to a Roth IRA, which grows tax free, and pay the income tax on the money transferred this year instead of later.
As part of the spending cuts mandated by Congress last year, Medicare Part D would get a 2 percent cut, which could increase out-of-pocket costs for Medicare recipients. Physicians who take Medicare patients could also see a pay cut, which might prompt more to stop accepting Medicare. Anyone on Medicare should talk to their doctor now about his or her plans and begin researching alternatives just in case. Social Security and Medicaid, however, are exempt from the cuts.
Estate and Gift Taxes
For seniors looking to transfer assets to their children, the next month could be the best time to do so, as estate and gift taxes could face a hefty increase. Soldano says seniors who can afford to make a large gift, may want to consider doing so by the end of the year. For the 2012 tax year, Americans with estates worth more than $5.1 million will pay an estate tax of 35 percent. If no changes are made, individuals with estates worth more than $1 million will pay a 55 percent tax in 2013.