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How to prepare for federal fiscal changes

Created date

December 25th, 2012

You can t flip on the TV or skim a newspaper these days without hearing or reading about the fiscal cliff, the catchall phrase to describe the numerous financial changes the U.S. government and taxpayers could encounter in 2013. Regardless of which side of the political aisle you re on, the reality is some of these new laws and regulations will trickle down to all of our pocketbooks. You may not be able to cast a vote on the federal budget, but you can tweak your own financial plan to put yourself in the best possible position. So, while you re making New Year s resolutions, add this to the list: a meeting with your financial advisor to figure out how impending changes could impact your bottom line.

Expiring tax cuts?

One of the most talked about and likely changes set to take place in 2013 is the expiration of the Bush tax cuts. It remains to be seen exactly how the end of the Bush tax cuts will shake out, but Washington investment advisor Roger Harper says most of us should prepare for some higher taxes. Harper says potential changes include increased income and capital gains tax rates, fewer personal exemptions and itemized deductions for high-income earners, and changes to tax rates for married couples filing jointly. For retirees, Harper says one of the most significant potential changes may be the reduction in exemption levels for estate and gift taxes from $5.12 million to $1 million per person. Always consult your advisor to devise a strategy that is right for your circumstances, but Harper offers this suggestion: One way to maximize the exemption, whatever it will be, is to put in place a bypass or credit shelter trust to take full advantage of the federal exemption, he says. As the laws change, it will be a good idea to make sure that language in your will is up to date so that it is consistent with the new laws.

Dividend income

If you rely heavily on dividend income to fund your retirement, California financial planner Jeff Motske says you may take a hit in 2013. He says taxes on dividends are set to increase from 15% to ordinary income rates, which could be as high as 40%, depending on your bracket. In positive news, Motske says the contribution limits for IRAs and 401(k)s are each increasing by $500 annually. That means you can sock away more tax-deferred cash if you are behind on retirement savings. While most news reports show health care costs are generally on the rise, Medicare patients may see some relief in 2013 as federal health care reform implementation begins. Nate Purpura, a Medicare consumer specialist with PlanPrescriber.com, says the new laws put a $6,700 cap on out-of-pocket expenses for Medicare Advantage subscribers. You may also be able to save on prescription drugs as generic versions of popular medications are rolled out. Purpura s advice to retirees is to spend health care dollars wisely by comparison-shopping for plans. Now is the time to see if you can get a better plan or better deal on prescription drugs, Purpura says. You really have to become a consumer of health care like you would be with cars or airplane flights.

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