Given the time of year, you may well be in the midst of gathering data for your 2013 tax return. As you embark on this project, you should be aware of a few new taxes you may have to pay. While I can’t cover everything, here are some of the bigger changes you might encounter.
(The changes outlined in this article were implemented in 2012 with the passage of the American Taxpayer Relief Tax Act (ATRA) of 2012, or with the Affordable Care Act).
Itemized Deductions and Personal Exemptions Phase-Out
Several years ago, the phase-out of itemized deductions and personal exemptions existed: If you earned above a certain amount of money, you lost some itemized deductions and personal exemptions. Eventually, those losses went away, but with the passage of ATRA, they are back.
Married filing joint taxpayers whose Adjusted Gross Income (AGI) exceeds $300,000 and single taxpayers with an AGI in excess of $250,000, are now subject to a phase-out of itemized deductions and personal exemptions (the earnings limits are indexed for inflation). For itemized deductions, the phase-out is 3% to a maximum reduction of 80%. For personal exemptions, they are reduced by 2% for each $2,500 of AGI above the threshold.
For example: A joint filer with $350,000 of AGI and $30,000 of itemized deductions would lose $1,500 of itemized deductions ($350,000 – $300,000 = $50,000 x 3% = $1,500). The same taxpayer with four personal exemptions would lose 40% of his or her total exemptions ($350,000 – $300,000/$2,500 x 2% = 40%).
Capital Gains and Dividends
The maximum federal capital gains rate is now 20%, and it is tied to your income tax rate. If you are in the top federal tax bracket (which is now 39.6%), then you will pay 20% on your capital gains. ATRA repealed the 8% and 18% tax brackets for those capital assets held longer than five years.
Qualified dividends are now permanent, but because they are tied to capital gains, they could be taxed at 20%.
|Income Tax Rate||Short-Term||Long-Term|
Affordable Care Act
The Affordable Care Act implemented two new taxes for 2013. The first is a Medicare Payroll Surtax; the second is a Medicare Surtax on Net Investment Income.
Medicare Payroll Surtax
Currently, all taxpayers pay 1.9% of their income (no limits) for Medicare. Starting in 2013, there is a new, additional 0.9% Medicare surtax on incomes above $250,000 joint and $200,000 single.
Medicare Surtax on Net Investment Income
A 3.8% Medicare surtax applies on the lesser of AGI above the threshold — $250,000 joint and $200,000 single — or net investment income. Net investment income includes interest, dividends, capital gains, rental income, and non-qualified annuities. (This list is not exhaustive, but will capture most of the income sources that our clients include.) It is interesting to note two items with respect to real estate:
1. Gains on the sale of your second home are included.
2. Gains in excess of the exclusion amount ($250,000 for singles and $500,000 for joint filers) on your primary residence are included.
For example: A single filer has $250,000 of AGI and $35,000 of net investment income. The taxpayer will pay the 3.8% surtax on the $35,000 of investment income since that is less than the $50,000 of “excess” AGI.
While most people will see an increase in their taxes for 2013 (and if you are a same-sex married couple filing jointly for the first time in 2013, you will no doubt see an increase), there will hopefully be fewer surprises for you after having read this column. If you have any questions, please contact your Wealth Manager or your income tax preparer.
Copyright: fergregory / 123RF Stock Photo