Tax Sticker Shock

facebooktwitterlinkedinby featheruncle_sam_pointing_fingerI was talking to a friend recently who indicated that she just paid an enormous tax bill. Although she was in the highest tax bracket, the amount of additional tax she had to pay was significantly higher than previous year. She was shocked. She wasn’t aware of any changes in her investment strategy. So what was  going on?

Many high income earners are first now feeling the effects, compliments of the American Tax Relief Act of 2012.

There are a lot of moving parts to this act, but for this discussion I will focus on two areas;

1-Long-Term Capital Gains & Dividends

2- Ordinary Income

A bit of vocabulary review.

A Capital gain results from the sale of what is called a capital asset,” which is generally defined as anything you own: stocks, bonds, mutual fund shares, your home.

Income from your business or IRA distributions on the other hands is defined as “ordinary,” income which means it gets taxed at a higher rate for many taxpayers.*

In 2012, the top Capital Gain rate was 15%..However for those high income earners, there is now a 20% capital gains rate for taxpayers with income above the threshold amounts of $406,650 for single income earners. However technically there is an additional adjustment which has to be made. A 3.8% Medicare surtax (Affordable Care Act) on investment income plus an additional 0.792% adjustment for itemized deductions. So the top Capital Gain Rate went from 15% in 2012 , to an adjusted rate of 24.59%, almost a 64% increase.

If you’re in the 10% or 15% federal tax bracket, single income earners under $36,000 are now eligible for the 0% capital gain rates. Thus the name “American Tax Relief.”

The maximum rate for Income above this rate stays at 15%.

Introducing the 3.8% Medicare Surtax (Affordable Care Act, aka Obamacare) Overview.

Beginning with the 2013 tax year, a new 3.8% Medicare “surtax” will apply to all taxpayers whose income exceeds the thresholds stated above. This new surtax will, in essence, raise the marginal income tax rate (the tax percentage on the highest dollar earned)  for affected taxpayers Thus, a taxpayer in the 39.6% which is the highest marginal income tax rate in 2013, would have a marginal rate of 43.4%

Here’s the break- down.

Surtax chart








Income tax & investment planning strategies are more important than ever. Coordinating your investment strategy with your tax professionals is key. Some general ideas may include:

  • Tax-deferred may no longer apply in all cases. Planning needs to be customized.
  • Spreading income over multiple years is a strategy which may mitigate the impact of the new laws.
  • Under the assumption that there maybe more taxable income in future years, an investor might accelerate long-term capital gains. Consider tax gain harvesting, a process of turning unrealized long-term capital gains into realized capital gains at a specific time for tax purposes.**
  • Clients above the threshold may want to focus on tax-exempt income.
  • Clients near the threshold- focus on year-to-year planning to accelerate income, stay below the threshold, and monitor investment income.


2012-2013 tax rates








*Ed Slott, The Retirement Savings Time Bomb



A special thanks to Benjamin Newhouse, fellow First Allied Advisor at for his research.

Please note, BH Wealth does not offer tax advice. Please see your tax professional for tax advice.

Written by Jaimie Blackman

Jaimie Blackman

Jaimie Blackman — a former music educator & retailer— is a Certified Wealth Strategist & Succession Planner. Jaimie helps business owners maximize the value of their company through education & coaching. He is a frequent speaker at the National Association of Music Merchants, (NAMM) Idea Center and has spoken at Yamaha’s succession advantage.

As a financial literacy educator he has taught at New York University and has lectured at the 92nd Street Y, Marymount Manhattan College and CUNY.

His column is published in The Music & Sound Retailer and contributes to NAMM U online, as well as other industry trade magazines.

Jaimie is CEO of Jaimie Blackman & Company, President of BH Wealth Management, and Creator of MoneyCapsules® and the Sound of Money®.

To register for Jaimie’s live webinars, or to subscribe to his podcasts, visit

The purpose of this post is to educate. Our content should not be construed as advice. If legal, tax or other advice is required by the readers, professional advice should be sought.

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