Effective for 2013, new rules have increased taxes or reduced
exemptions on higher earning taxpayers, making effective year-end tax planning
even more important.
Under the Affordable Care Act there is a higher payroll tax and surtax
on unearned income of higher-income individuals. Under the American Taxpayer
Relief Act of 2012 higher tax rates apply to ordinary income, capital gains and
dividends, while at the same time limitations are imposed on the use of the
personal exemption and itemized deductions.
For tax years beginning after Dec. 31, 2012, the following new rules
apply:
- Increased payroll tax. A new 0.9%
hospital insurance tax (FICA payroll tax) applies to wages received in
excess of $250,000 for joint returns; $125,000 for married filing separate;
and $200,000 for all other taxpayers. The additional 0.9% tax also applies
to self-employment income that meets or exceeds the above thresholds.
- Surtax on unearned income. An unearned income Medicare contribution tax is
imposed on individuals, estates, and trusts. For an individual, the tax is
3.8% of the lesser of (1) net investment income or (2) the excess of
modified adjusted gross income over $250,000 for a joint return or
surviving spouse, $125,000 for married filing separate, and $200,000 for
all others.
- Higher individual income tax rates. The income tax rates for most individuals stay the same
as in 2012. However, a new 39.6% rate applies for 2013 income above $450,000
for joint filers and surviving spouses; $425,000 for heads of household;
$400,000 for single filers; and $225,000 for married filing separately.
- Increased capital gain and dividend tax rates. The top 2013 tax rate for capital gains and dividends
rises to 20% for taxpayers with incomes exceeding $450,000 for joint
filers and surviving spouses; $425,000 for heads of household; $400,000
for single filers; and $225,000 for married filing separately.
- Personal exemption phase out. There is a personal exemption phase out for 2013 with a beginning threshold of
$300,000 for joint filers and surviving spouses; $275,000 for heads of
household; $250,000 for single filers; and $150,000 for married filing
separately. Under the phase out, the total amount of exemptions that can
be claimed by a taxpayer is reduced by 2% for each $2,500 (or portion
thereof) by which the taxpayer's adjusted gross income exceeds the above
threshold.
- Limited itemized deductions for high earners. There is a limit on itemized deductions for 2013 for
earners with a threshold of $300,000 for joint filers and surviving
spouses; $275,000 for heads of household; $250,000 for single filers; and
$150,000 for married filing separately. Thus, the itemized deductions of
taxpayers subject to this limitation will be reduced by 3% of the amount
by which their adjusted gross income exceeds the threshold amount. The
reduction will not exceed 80% of otherwise allowable itemized deductions..
Year-end tax planning may be especially productive this year
because timely action by the taxpayer could secure significant tax breaks.
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