Eight Important Retirement Money Questions for 2013

by Philip Moeller

As 2012 draws to a close, people in or nearing retirement face a stunning set of uncertainties about their finances and even basic health and retirement benefits. Congress has left Washington for the Christmas break without passing any measures to delay or soften the effects of the so-called fiscal cliff. Perhaps it might still act before the end of the year, but don't count on it. Odds are that the new Congress that takes office next year will take action to prevent the very worst outcomes. But after years of gridlock, should we really expect things to get better?

Here are eight pressing money and benefit issues that are barreling down on seniors. All of them are bad news. And while there aren't a lot of places to hide, it's important for anyone trying to build or conserve a retirement nest egg to develop contingency plans.

1. Tax rates. The Bush tax cuts expire December 31. All income tax brackets will shift upward--the 10 percent bracket disappears and the new lowest tax rate will be 15 percent. The 25 percent bracket becomes 28 percent; 28 percent becomes 31 percent; 33 percent moves to 36 percent, and 35 percent will be 39.6 percent. The capital gains tax rate will rise to 20 percent from 15 percent, and dividend taxes will soar, moving from being taxed as capital gains to being treated as ordinary income.

2. The Alternative Minimum Tax. The AMT was aimed at preventing wealthier taxpayers from using deductions and other tax benefits to escape their fair share of taxes. However, the qualifying income levels were not indexed for inflation. Congress has thus had to enact an AMT "patch" each year to help millions of taxpayers avoid extra taxes Congress never intended for them to pay. There is now no patch in place for 2012 income taxes. That's right: the taxes that are due on this year's income. Even if Congress does something soon, tax-filing season likely will be delayed. If Congress does not approve a patch, the number of taxpayers hit by AMT payments will rise from 4 million to 34 million.

3. Social Security COLA. Fiscal-cliff negotiations between the White House and Republicans reportedly included the Obama administration's acceptance of a new formula for setting the annual cost of living adjustment (COLA) for Social Security beneficiaries. Called the chained CPI, it may, as supporters and many economists claim, represent a more accurate cost of living measure than the index now used to set each year's COLA. But it would also cut effective Social Security benefits by more than $20 billion a year after it has been in place for several years. It would also raise income-tax bills by reducing the size of the automatic inflation adjustments the tax brackets use to determine different income tax rates.

4. Estate taxes. Estate and gift tax rules are now unusually generous. Individual estates up to $5.12 million (double that for a couple) avoid all estate taxes, and amounts above these levels are taxed at 35 percent. This is also the rate for gift taxes. Without action by Congress, the estate-tax exclusion will plunge to only $1 million in 2012, and the tax on larger estate values will be 55 percent.

5. Medicare taxes. Medicare taxes will rise on wealthier wage earners in 2013. This change is part of the Affordable Care Act and not part of the fiscal-cliff impasse. Medicare payroll taxes, now set at 1.45 percent of payrolls, will rise another 0.9 percent on wage incomes above $200,000 in 2013 ($250,000 for couples). These same income limits will be used to trigger a 3.8 percent annual tax on net investment income. The proceeds will be used to help fund health-reform changes.

6. State insurance exchanges. When health reform is fully implemented in 2014, older people not yet eligible for Medicare will have guaranteed access to health insurance regardless of any preexisting conditions, at rates that are held down by rules limiting age-based premium hikes. These benefits will be delivered in large measure through new state-based insurance exchanges. These exchanges are supposed to be set up in 2013 so they can be fully operational before the end of the year. However, most states have decided not to build their own exchanges but to let the federal government do it for them. Odds of this work being done in time, let alone being done well, are seen as very small.

7. Medicaid expansion. In 2014, health reform would provide expanded healthcare to currently uninsured, lower-income Americans through a massive expansion of Medicaid at the state level. The federal government would pay all added expenses for three years and states would never pay more than 10 percent of the expenses from the expansion. Still, many states have spurned the act's offer of expanded coverage, saying they do not like the potential for higher state expenses and the rules that come with the expanded services.

8. The doc fix. In a 1997 law, Congress tied Medicare's payments to physicians to the growth of the economy. Medicare cost increases, including physician expenses, regularly exceed overall economic growth. Under the law, Medicare payments to physicians would have to be cut each year were it not for periodic Congressional action to override the cuts. Without another fix, doctors will see a 27 percent cut in their Medicare payments next year, and an unknown number of them would stop taking Medicare patients. Like much else in Washington, the doc fix has become part of the broader fiscal-cliff debate.

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Six Tax Issues to Watch in 2013

With the "fiscal cliff" and tax hikes looming, Americans are facing a number of insecurities about their tax lives in 2013.  Market Watch's Christopher Noble looks at what tax issues will affect you the most and what you can do about them right now.

Your One-Week Year-End "Fiscal Cliff" Money Plan

by Linda Stern

By now, we thought the path forward would be clear and the usual six-day flurry of tax-focused check writing and income-shifting could commence.

But we're still in wait-and-see mode; watching to see what happens next. Either Washington will rush through a year-end package of tax and spending cuts or we will plunge over the so-called "fiscal cliff" of tax increases and sharp spending cuts. Even if that happens, President Obama and Congress could agree on a retroactive package early next year that would limit the repercussions of the over-the-cliff scenario.

So, what do you do now? Avoid placing huge bets and consider these moves while you're watching your government in (in)action.

Stash cash for January. It's probably going to be a rough month. Even if there's an 11th hour cliff plan, it is unlikely to reinstate the 2 percentage point cut in Social Security payroll taxes that all workers have been benefiting from for the last two years. That means families with median household income of $50,500 will take home $84 less a month in 2013 than they did in 2012.

Furthermore, January is always a month of reckoning with holiday bills, high heating costs, a resetting of health insurance deductibles and scant balances in flexible spending accounts. So, you're going to need cash. You may even hold on to some money you don't need to disburse until April (like Roth individual retirement account contributions), just to make sure you will have enough on hand to get through January.

Shift income based on your income. If you live in a high-tax state, have kids and make between $33,750 and $49,500 ($45,000 to $76,000 for couples), you are a sitting duck for the alternative minimum tax. Originally conceived as a method of insuring that rich people don't get out of paying taxes altogether, the AMT has morphed into an extra tax that penalizes large families and those who pay high local taxes. Congress usually mitigates that by "patching" the AMT rules so they only apply to higher incomes; in 2011 the AMT hit singles earning more than $48,450 and couples earning $74,450. Without a patch moving those numbers up by roughly 2 percent for 2012, they will fall all the way back to $33,750 for singles and $45,000 for couples. It's not entirely clear that a patch can be passed to be effective retroactively for tax year 2012. That is true even though the Internal Revenue Service and TurboTax are already acting like the patch will emerge.

To play that cautiously, don't race to pay your state property taxes before the end of the year. While that could cost you money in April because you will have lower deductions, it will secure your deductions for next year and perhaps protect you from the AMT in 2012, should the patch fail to materialize.

Feel confident that you'll get patched? Write the check now.

Sell. If you have not been part of all the selling on Wall Street, there is still time. Your capital gains will be taxed at a rate of 15 percent or less if you sell before the end of the year. In 2013, that rate stands a decent chance of going up to 20 percent. There's no harm in taking the gain now; you can re-buy the same security right away if you want to keep holding it.

Write the charity checks. If you itemize deductions they will offset income taxes for 2012, and there's certainly plenty of need wherever you look now. If you are wealthy, you stand a decent chance of having your deductions clipped next year, so you might as well write the checks now.

If you're retired, don't itemize deductions and have been turning over your required minimum IRA distribution to a charity, don't expect the same tax break you got last year. That provision - to allow non-itemizers a tax-free IRA withdrawal if it goes to charity - expired at the end of last year. Maybe it will come back, but that's a very long shot now. Write the check anyway, if you just want to be charitable, but not if you can't afford it without the write-off.

Plan to be frugal. There's no version of a "fiscal cliff" resolution that ends with a more expansive government fiscal policy. Either your benefits will be clipped -- in the form of less college financial aid, curtailed Social Security benefits and the like -- or your taxes will go up. Over the long term, items like deductions for mortgage interest on second homes and employer write-offs for health insurance could be in play. Consumers already have shown themselves to be more frugal than they used to be -- holiday-linked retail sales growth slowed significantly once the fast-track "fiscal cliff" fix went off the rails. Households have been paying down debt for much of the last five years. It couldn't hurt to keep that up for a while.

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