The American Taxpayer Relief Act of 2012 brought many changes to the tax law and an increase in tax rates that haven’t been witnessed in years. While the Bush-era tax cuts that were enacted in 2001 were largely left unchanged, new and higher tax rates for “wealthy” Americans may result in tax increases for those not aware of the Act.
First, there is a new 39.6% tax rate for taxable income over $400,000 for single individuals and $450,000 for married filing jointly. The capital gains tax rate for these same taxpayers has also increased from 15% to 20%. Combined with these new tax rates, a significant “marriage penalty” arises. While two single individuals can have taxable income of $400,000 each, for a total of $800,000, prior to the imposition of the 39.6% and 20% rates, for married persons filing joint returns, they are assessed at taxable income over $450,000. The phase-out of certain personal exemptions and itemized deductions also makes an unwelcome return after having been repealed the last few years.
Obamacare taxes related to the Affordable Care Act may also increase your tax bill for 2013. For those with investment income, there is a new 3.8% Medicare tax on the lesser of net investment income (interest, dividends, capital gains, rental income, royalties, passive income, etc.) or adjusted gross income in excess of $200,000 for singles and $250,000 for those married individuals filing jointly. Wage earners and self-employed taxpayers may also see an increase in their tax bill, thanks to the new 0.9% “additional” Medicare tax on earned income in excess of $200,000 for singles and $250,000 for married filing jointly.
All is not doom and gloom for 2013, as there were significant changes to the estate tax law. While the estate tax rate increased from 35% to 40%, the exclusion of $5,250,000, indexed for inflation, was made “permanent”. In addition, any unused exclusion remains portable, whereby the exclusion amount that the first spouse to die was not able to use can be transferred to the second spouse, which can result in an overall exclusion amount of $10,500,000, indexed for inflation, for married individuals. This eliminates certain planning issues that arose when one spouse had a larger estate than the other.
Based on the above, certain areas that you may want to consider before the end of the year include the following:
- Maximize your retirement plan contributions, especially in light of increases to these amounts from 2012, or if you are age 50 or over.
- Evaluate any year-end bonuses to determine whether it may be advantageous and possible to defer these until 2014, and that your income tax withholding on any of these amounts is adequate.
- Review your investment portfolio in order to ascertain whether or not you have gains or losses that you may want to realize, either for tax planning or wealth planning purposes. For any capital losses, you need to be aware of the “wash” sale rules and the $3,000 limitation on the deductibility of capital losses over capital gains.
- Considering the increase in the standard deduction and the increase in the medical threshold from 7.5% to 10% of adjusted gross income, you may want to consider “bunching” these types of deductions in certain years in order to maximize their overall tax benefits.
- Evaluate your Regular IRA accounts in order to determine whether a conversion to a Roth IRA makes sense for you.
- If you are age 70-1/2 or older, consider making your Required Minimum Distribution from your IRA directly to a qualified charity. The contribution will not be deductible, but the distribution is not taxable, either, which would have increased your Adjusted Gross Income.
- For those facing foreclosure of their primary residence, the favorable rules related to the income exclusion are scheduled to expire at the end of 2013.
While the above changes are significant, given the relatively minor changes over the past few years, we are extremely qualified to assist you in the implementation of these laws and are available to discuss your personal tax situation and prepare a tax projection for you.
To ensure compliance with the Internal Revenue Service and Treasury Department regulations, we wish to inform you that any tax advice that may be contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or applicable state or local tax or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein.
Material discussed in this article is meant to provide general information and should not be acted on without professional advice tailored to your individual needs.