Back in 2010, Congress enacted a 3.8% surtax to cover the cost of health care reform that takes effect in 2013 no matter what lawmakers do on the Bush tax cuts. The betting right now is that this will not be delayed when Congress agrees to extend the expiring tax breaks. So as you contemplate our year-end tax planning, keep the surtax in mind…it could make a difference.
The 3.8% tax levy boosts the top rate on capital gains and dividends to 18.38% for high-income individuals. It hits singles with modified adjusted gross income above $200,000 ($250,000 for married couples). The surtax is on the lower of the filer’s net investment income or the excess of modified AGI over the threshold amounts.
Consider selling appreciated assets in 2013 (residence, rental properties, vacation homes, stocks, etc.). If you’re planning a Roth conversion, doing it this year may be advantageous. Deferring compensation beyond 2012 may not be a good idea if doing so pushes your income above the thresholds. These strategies are much different that before where you would generally want to defer income recognition to the next year (after all, why pay taxes now when you can pay them later). However given the 3.8% surtax, it just may not make sense to defer the income for many individuals.