With all the attention being paid to Obama Care and the recent government shutdown, no one is really talking about the tax increases taking effect this year. If you haven't done 2013 tax projections, you should get right on it, or you may have an unpleasant surprise on April 15. Following are the major changes effecting individual taxpayers.
In addition to the ordinary income tax rate increase to 39.6% for the highest income taxpayers, the top rate for capital gains and dividends increased from 15% to 20%. Fortunately, capital loss carryovers may be used to offset capital gain income.
Married taxpayers with "Modified Adjusted Gross Income" over $250,000 may be liable for a 3.8% surtax on net investment income. This surtax is on the lesser of net investment income or the amount by which MAGI exceeds a threshold amount. The threshold amounts are $250,000 for married filing joint, $125,000 for married separate, and $200,000 for any other filing status. The effect of this surtax can be taxation of long term capital gains at 23.8%, or as high as 43.4% for short term capital gains. For long term capital gains, this represents a 60% tax increase from 2012 rates.
2013 also brings the introduction of the Additional Medicare Tax by adding .9% tax on covered wages in excess of threshold amounts. The threshold amounts are identical to those set for the Net Investment Income Tax. For example, a married couple will pay 1.45% on the first $250,000 of compensation plus 2.35% on the excess. Unlike Social Security, there is no cap on this tax.
The so called "Pease Limitation" on itemized deductions of high income taxpayers is back for 2013. This limitation reduces otherwise allowable itemized deductions. The deduction for personal exemptions is also phased out for higher income taxpayers.
Prior to 2013, the itemized deduction for medical expenses was subject to a 7.5% floor, that is, expenses were deductible to the extent that they exceeded 7.5% of adjusted gross income. For 2013, that floor has been increased to 10% of adjusted gross income.
While there is still time, you should review these changes and their effect on you. Steps can be taken that may reduce your tax liability. You should also review the status of your withholding and estimated tax payments to be sure that they are sufficient to avoid penalty. Contact us if you have any questions or need assistance.
