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Slott Report Mailbag: How Does the New Tax Law Affect Me?

We have covered the new tax law (the American Taxpayer Relief Act of 2012) from both a retirement planning and tax planning standpoint since it was signed into law by President Barack Obama on January 2, 2013.  We wrote a quick analysis of the law complete with a 5-plus-minute video on 5 key planning pointsWe followed with a detailed look at qualified charitable distributions (a topic we get frequent questions about), and how they were affected by the new law.

Since then, we have added the following: an in-depth site on 2013 IRA and tax tables, a piece on the many ways taxes have increased (even if your income taxes did not), and a look at the new in-plan Roth conversion provision and how it (and other factors) have made the Roth conversion decision more difficult.

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Yet, this 157-page law is complex, and The Slott Report will cover every inch and answer many questions on the new tax law throughout the year.  We have devoted this week's Slott Report Mailbag to some of the popular questions we have received about the new tax law. As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure. Find one in your area at this link.

1.

My wife and I make $500,000 between us and file a joint tax return. Will our income taxes be going up because of the new tax law?

Answer:
Yes. If your taxable income is over $450,000, you will face a new top tax bracket of 39.6%. In addition, you may see your exemptions and deductions reduced, you will have to pay a 0.9% surtax on gross wages in excess of $250,000, and you may also have to pay the 3.8% surtax on net investment income if applicable.

2.

Talking heads are saying the gift tax exemption became even more advantageous thanks to the new 2013 tax law. What makes it even better now than before?

Answer:
The lifetime gift tax exemption is now $5,250,000, up from $5,120,000 last year. In addition, portability, which is a rule allowing a surviving spouse to add any unused exemption amount from his/her spouse to his/her own exclusion amount, has been made permanent.

The annual gift tax exclusion amount for 2013 is $14,000, up from $13,000 last year. You can give up to $14,000 a year to as many people as you wish, totally free of any gift tax. The reason for the increase is to reflect inflation.

3.

I want to take advantage of the in-plan Roth conversion provision from the new tax law. I know one of the advantages of a Roth conversion is the ability to recharacterize by a specific date if I see the converted amount dropping in value. Does that also hold true for in-plan conversions?

Answer:
No. That is the biggest drawback to doing an in-plan Roth conversion. It is an irrevocable election. There are no do-overs.

4.

I've heard a lot about a new planning tool that was part of the new tax law. I have a 401(k) plan at my workplace. Can I convert part of that over to a Roth IRA?

Answer:
Maybe. If you are eligible to take a distribution from your plan, you can convert that amount directly to a Roth IRA. The new feature in the law was for 401(k) plans (or 403(b) or governmental 457(b) plans) that allowed a Roth feature, known as a Roth 401(k) (Roth 403(b) or Roth 457(b)), within the 401(k) plan. The law now allows all plan participants to convert their 401(k) assets to a Roth 401(k). Employer plans are not required to have a Roth feature and they are not required to allow these in-plan Roth conversions.

5.

An AMT patch was permanently passed as part of the new tax law. What is an AMT patch and who does it affect?

Answer:
The AMT is an alternative minimum tax system. It runs parallel to our "regular" tax calculations. If you have too much income and not enough tax, the AMT will kick in and you will have to pay more in income tax. It was originally instituted to try and make sure that the wealthy paid their fair share of taxes. However, it was never adjusted for inflation so each year more taxpayers were subject to the additional tax. As a result, Congress "patched" the AMT each year. The new tax law included the patch for 2012 and will index the AMT from that amount each year in the future.


- By Joe Cicchinelli, Beverly DeVeny and Jared Trexler

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