Pathways Advisory Group, Inc.
Dustin Smith, CFP®
Uncertainty has been a major tax planning “roadblock” the past few years. Although perhaps misnamed, the “American Taxpayer Relief Act of 2012” (passed January 1st, 2013) did put an end to the uncertainty. Here is what to expect in 2013 (and beyond):
Tax Rates: 2012 Income Tax rates and Dividend/Capital Gain Tax rates were retained for Married Joint Taxpayers with taxable income below $450,000 ($400,000 for Single Taxpayers). However, ordinary income above this threshold will be taxed at a new top marginal tax rate of 39.6%. Qualified dividends/capital gains above the threshold will also be taxed at a new top rate of 20%.
Estate Tax: The Estate Tax Exemption rises to $5.25 million in 2013 and becomes permanently indexed to inflation. The top estate tax rate, for estates exceeding the exemption, increased from 35% in 2012 to 40% in 2013. The “portability” of the estate tax exemption, previously explained in a January 2011 blog, was also retained.
Social Security: The amount of earnings subject to Social Security (FICA) tax, otherwise known as the “wage base”, increased from $110,100 in 2012, to $113,700 in 2013. However, the temporary reduction of the employee FICA tax rate to 4.2% expired. The employee FICA tax rate returns to 6.2% effective January 1st.
Personal Exemptions and Itemized Deductions: Most taxpayers benefit from a Personal Exemption ($3900 in 2013) on their tax return. Some taxpayers also benefit from Itemized Deductions. However, both deductions are subject to a reduction in 2013 for Married Taxpayers with Adjusted Gross Income (AGI) exceeding $300,000 ($250,000 for Single Taxpayers). The Personal Exemption can actually be completely phased out if AGI exceeds $383,950 ($331,650 for Single Taxpayers). These provisions originally expired in 2010.
AMT: Unfortunately, the Alternative Minimum Tax system was not repealed by the “American Taxpayer Relief Act of 2012”. But, it was permanently indexed to inflation. This is good news – avoiding the uncertainty of the last minute “patch” each year.
In addition to the above changes, there are some 2013 Tax Law changes enacted by the Patient Protection and Affordable Care Act:
Surtax on Net Investment Income: A new Medicare Surtax on “net investment income” will take effect in 2013. The new 3.8% tax will apply to the portion of “net investment income” exceeding $250,000 of Modified Adjusted Gross Income (MAGI) for Married Joint Taxpayers ($200,000 for Single Taxpayers). “Net Investment income” includes rental income, dividends, interest, capital gains, royalties, passive income and nonqualified annuity payments. But it does NOT include tax exempt “gains” on the sale of a principle residence.
Itemized Medical Deduction Floor: The “Floor” that your Itemized Medical Expenses must exceed to qualify for a deduction, will increase from 7.5% of Adjusted Gross Income (AGI) in 2012, to 10% of AGI in 2013. This will make it more difficult to qualify for the deduction. However, the increased “floor” doesn’t take effect until 2017 for taxpayers over age 65.
Medicare: The Medicare tax rate remains at 1.45% (2.9% for Self Employed) for Married Joint Taxpayers with earned income below $250,000 ($200,000 for Single Taxpayers). However, the Medicare tax rate increases to 2.35% (3.8% for Self Employed) on earned income above these thresholds, effective January 1st.
In addition to changes to the Federal Tax code, Prop 30 will impact some California Taxpayers:
California Prop 30: California Tax brackets were modified by Prop 30 to include new 10.3%, 11.3%, 12.3% and 13.3% brackets. I could not find an official release of the 2013 Tax Brackets. But the new brackets appear to be triggered by Married Taxpayers with taxable income exceeding $500,000 ($250,000 for Single Taxpayers). And the new top bracket (13.3%) appears to affect all taxpayers with income exceeding $1,000,000. Keep in mind Prop 30 was retroactively applied to the 2012 Tax Year. And it will be in effect for 7 years.
These changes will mean a substantial tax increase for some. For others, the impact will be modest. But a more permanent tax structure is good news for all! For the first time in a while, we don’t have to deal with expiring tax rates in December…
The above explanation is summarized. It is not all inclusive. Please confirm all specifics with your tax professional. Some additional information regarding: Federal Tax changes (IRS publication ), the new Medicare Tax Rate and Medicare “Surtax” (Fidelity Summary ), Education Tax Credits (ACE Summary ), the impact of prop 30 on 2012 California Taxes (FTB link).
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