Instead of breathing a sigh of relief over the fiscal-cliff deal, the country should be holding its breath, says a Garden State certified public accountant. The reason? Higher taxes for everyone, including the middle class.
“Your politicians lied to you when they said only the rich would pay more,” says South Jersey CPA Brian Greenberg. “Practically speaking, all working Americans will see taxes rise in 2013. The idea that only the rich would pay more was an outrageous lie.”
For example, the Social Security payroll tax has gone up 2 percent, to 6.2 percent. Actually, Greenberg adds, the rate is double that, since the employer also pays the same amount on behalf of an employee.
And that’s not chump change. “I just got an e-mail from a client whose household income is $175,000, and the reality is they’re going to be paying about $4,000 more in taxes, which is a big hit,” Greenberg said.
So what do you do? Tax professionals repeat the standard advice for almost everyone: Make maximum contributions to qualified retirement plans as a way of reducing taxation.
Those investing should “include maximizing contributions to tax-sheltered accounts such as IRAs and 401(k)s, placing assets in tax-sheltered vehicles,” writes Christine Benz, director of personal financial planning for Morningstar, a Chicago-based fund-rating service.
Benz also advises investors in taxable accounts — i.e., those who aren’t in 401(k)s or IRAs — to find low-cost funds that don’t do a lot of trading. Each time a fund sells a winning stock, it pays a capital gain, she notes. And that means a tax bill for the investor.
Greenberg and other advisers say there is another strategy that would increase taxes now, but one could save large amounts over the long term.
“It is now easier for your employer to let employees convert their traditional 401(k) account to a Roth 401(k). That could be a big tax saving, especially for younger workers,” according to Bernard Kiely, a CPA in Morristown, NJ.
Kiely said the little-noticed Roth conversion provision of the recent tax bill could save tens of thousands of dollars in taxes over decades.
“What you are doing is paying taxes upfront, and then all the growth in the retirement account will never be taxed,” Kiely says.