Your Finance: Goodies in last-minute 'cliff' deal
Carry on, everyone. That's the first take-away from the "fiscal cliff"-averting tax deal struck literally in the eleventh hour on Tuesday.
It wasn't the kind of tax bill that allows for a raft of quick financial planning opportunities, in part because the bill was passed after the books on 2012 have closed, so there's no going back now and fiddling with your year-end deductions.
Nevertheless, there are a few goodies in the bill for many taxpayers, and some new traps that point to long-term strategies. Here's a first look at how to make the most of the new tax rules.
For most taxpayers, the immediate hit will be the end of the temporary 2 percentage point cut in payroll taxes for Social Security. For the average family earning $50,500 a year, that means you'll see roughly $84 less a month now.
-- Invest in dividend-earning stocks. Taxes on long-term capital gains and most dividends will now permanently be lower than income tax rates. That means buying dividend-earning stocks and growth stocks outside of your tax-deferred retirement plan. Folks earning too much to get the zero rate but less than $400,000 ($450,000 for couples) will have a 15 percent rate on long-term gains and dividends. Those earning more will have a 20 percent rate.
-- Save wisely for college. The Coverdell education savings account allows more individual control (and often lower fees) than the 529 plan, but it was never very popular because it was on temporary status and had relatively low contribution limits. Now, it permanently allows people to contribute as much as $2,000 a year per child.
-- Explore Roth 401(k) plans. A new provision allows workers to move money from their existing 401(k) plans into Roth 401(k) plans. That would mean paying income tax on the amount you move over, but then allowing the funds to build in the Roth forever without paying taxes on the earnings. That will only apply to people who work for employers who offer both traditional and Roth 401(k) plans.
Convert to the Roth if you expect your retirement tax rates to be higher than your current tax rates. That may be the case if you are a young low-earner, or if you already have so much money saved in your tax-deferred accounts that you will get hit with high-bracket distributions when you're 70½ and have to start taking withdrawals and the tax hits that go with them.
-- Make itemized deductions. The new rules phase out itemized deductions and the personal exemption for individuals with more than $250,000 in taxable income ($300,000 for couples filing jointly.) The calculations are complex, but they shave more and more off those write-offs as a taxpayer's income rises.
The new bill also makes permanent the fix for the marriage penalty that affected couples who otherwise would have to pay higher taxes than if they stayed single.