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Investing Specialists

The Error-Proof Portfolio: Anticipating 2013 Tax Changes Could Save You Some Dough

Advanced planning can help reduce your tax bills if and when tax rates pop back up.

Investors have had a tough slog during the past decade, but you can't say it's because of the tax regime. Dividends, taxable as ordinary income during the late great bull market of the 1980s and 1990s, have been taxed at or below 15% since 2003, provided they meet certain criteria. The same goes for long-term capital gains, which were taxed at rates of 28% or higher as recently as the late 1990s. 

But all of that is set to change in 2013. Barring congressional action, dividends will again be taxable at ordinary income tax rates starting next year, and the highest income tax rate will pop up from 35.0% currently to 39.6% in 2013. Long-term capital gains, meanwhile, will be taxable at 20% for most investors and 10% for those in the 15% tax bracket or lower. A new Medicare surtax will also kick in that will levy a tax on high-income households' investment income, and the estate tax will ensnare many more estates if the exemption exclusion drops to $1 million, as it is scheduled to do next year.