Staying on Top of the Fiscal Cliff

Grace YungHow to maximize your investments, even if your paycheck is smaller
by Grace S. Yung, CFP

While this past January 1 brought with it the much-discussed fiscal cliff, the new year also rang in some better news than many taxpayers had originally expected—being more advantageous to most Americans in terms of one’s net income, as well as the net amount that may be kept on investment earnings. And, although LGBT couples are unable to file their taxes jointly based on the federal definition of marriage, there may still be some advantages for single filers in terms of maximizing investment return and minimizing tax-related consequences.

While there are likely to be more changes in store for the future, here is how the breakdown currently looks with regard to income and investment-related taxes:

• Personal Income Taxes. For individuals who earn an annual income of $400,000 or higher ($425,000 or higher for those who file their taxes as a head of household, and $450,000 for married couples who file jointly), the largest income tax rate in almost two decades will be imposed—increasing to 39.5 percent. The good news is that for those who earn less than this amount, income tax rates will remain unchanged.

• Capital Gains and Dividend Taxes. Taxpayers earning $400,000 or above will also see a rise in their tax rates on investment dividends and capital gains, going from 15 percent to 20 percent. However, the rates here will remain at 15 percent for taxpayers who earn less.

• Estate Taxes. The expected increase in estate taxes was also implemented, going to a top tax rate of 40 percent from 35 percent, with a $5.25 million exemption. Going forward, this particular threshold will be indexed for inflation.

• Alternative Minimum Tax (AMT). While there was also a rise in the AMT exemption level of $33,750 for single taxpayers (and $45,000 for married couples filing jointly), these amounts are quite a bit less than the anticipated figures of $50,600 and $78,750, respectively.

• Payroll Taxes. Although the most recent fiscal cliff deal did not address payroll taxes, this rate increased from 4.2 percent—the rate that has been in place for the past two years—to 6.2 percent as of January 1, 2013. With this new rate, just under 80 percent of households will be faced with slightly higher payroll tax, resulting in a lower amount of net take-home pay.

Finding Investment Opportunities Post-Fiscal Cliff

Given these lower-than-anticipated taxation amounts, there is ample opportunity to maximize your investment opportunities. In fact, the unchanged rate for capital gains and dividends is being seen as a major bonus for investors—especially those who make use of dividend-oriented investment methods.

While interest rates are low, yielding roughly $500 per year on $100,000 invested in CDs and bonds, dividend-paying stocks could provide many advantages for investors. These vehicles can provide a way to earn investment income that is oftentimes more than many other alternatives, and at the same time offer a tax rate that is less than that on interest income.

So where can good solid dividend-paying stocks be found? One good place to start looking is within the S&P 500. Of the five hundred companies that are listed here, roughly four hundred are currently paying dividends.

Other Considerations

Other areas that remain to be discussed throughout 2013 include the solvency of Medicare and Social Security. It is anticipated that the changes that are made to either or both of these programs may very well mean a smaller amount of benefits during your retirement years. This can be especially important to those in the LGBT community, as benefits in these areas are considered as going to “single” individuals, with no spousal-related considerations.

With this in mind, it is a good idea to increase savings wherever possible, but specifically in the area of tax-advantaged accounts such as 401(k)s and IRAs (Individual Retirement Accounts), and tax-deferred products.

While doing so, however, it is essential to keep in mind that all situations call for a plan that fits in with your specific financial goals. Given this, all planning should be conducted using qualified professionals who are well versed in the areas of both tax and finance.

Grace S. Yung, CFP, is a certified financial planner practitioner with experience in helping domestic partners plan their finances since 1994. She is a principal at Midtown Financial LLC in Houston.


See other MoneySmart columns:

Finding the Funds …to make your IRA contribution (February 2013 OutSmart)

What’s Different for 2013? (January 2013 OutSmart)
Considerations for Texas and your future investments.

LGBT Partners… (December 2012 OutSmart)
Working around the denial of your government benefits

Future Tax Rules Can Further Penalize LGBT Investors (November 2012 OutSmart)
But there is still time to act

Protecting your Wallet and your Heart (October 2012 OutSmart)
How and when to keep assets separate—even when you’re madly in love

Domestic Partner Tax Deductions in Home Ownership (September 2012 OutSmart)
With today’s historically low interest rates, it’s certainly a great time to either purchase or refinance a home.

Dying Intestate (August 2012 OutSmart)
Could you be leaving the state in charge of distributing your assets?

Protecting the Things that Matter (July 2012  OutSmart)
How those in the LGBT community can use life insurance planning strategies

When ‘I Do’ Becomes ‘I Don’t Anymore’ (June 2012 OutSmart) 
Ensuring both partners’ fair share with a Domestic Partnership Agreement

Retirement (May 2012 OutSmart)
Using annuities can provide lasting income for both domestic partners: When depending on a partner’s retirement income, annuities can offer the perfect solution

Financial and Tax Planning Issues for Domestic Partners (April 2012 OutSmart)
Is Uncle Sam getting a bigger chunk of your income and wealth?

The Real Cost of Long-term Care (February 2012 OutSmart)
How LGBT caregivers are paying the price

Gay Money Matters (part 1) (February 2010 OutSmart)
Domestic Partners: Estate and Tax Planning

Gay Money Matters (part 2) (February 2010 OutSmart)
Protecting your assets . . . even when the rules don’t



Grace S. Yung

Grace S. Yung, CFP, is a certified financial planner practitioner with experience in helping domestic partners plan their finances since 1994. She is a principal at Midtown Financial LLC in Houston and was recognized as a “Five-Star Wealth Manager” in the September 2017 issue of Texas Monthly.

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