There are a few important changes in the 2013 tax year that may have a significant effect on your tax planning. You may have heard about the new tax brackets and tax rates for higher earners, but there have also been changes for individuals across most tax brackets.
You can learn more in this very short VIDEO, or see below for an overview of some of the major changes and a few additional tips and pieces of information about taxes in 2013.
New Tax Rates & Deduction Rules
Most filers will pay the usual tax rates for 2013, but for higher earners there are two new tax brackets. For individuals with incomes over $400,000 ($450,000 for married couples), there is a new 39.6 percent income tax bracket and also a new long-term capital gains tax of 20 percent. This doesn’t just affect high earners: if your income was higher than usual this year, maybe from an asset sale or other windfall, you may find that you owe more than expected, and you might want to consider holding off on selling long-term holdings until next year.
Additionally, if your Adjusted Gross Income (AGI) is above $250,000 as a single filer ($300,000 for married couples), you may find that your personal and dependency exemptions have been subjected to new limits. In other words, your usual deductions might be lower this year, or phased out completely. So, if you usually time your income and deductions, you may want to take a look at whether it makes sense to put off certain deductions until next year, as they may not qualify if your AGI is too high in the 2013 tax year.
New Medicare Taxes
There is also a new 0.9 percent Medicare payroll tax which applies for people earning over $200,000 ($250,000 for couples). However, this isn’t as simple as seeing the new tax on your W2, as your actual amount due will depend on your marital status, whether you have more than one job or other sources of income, such as self-employment. You might only get to a final amount due after you put your filing together, so again I recommend taking the time to get started early so you can estimate any additional amount you might need to pay.
In addition to the 0.9 percent Medicare payroll tax, a new 3.8 percent Medicare contribution tax has also been implemented on capital gains for those with an AGI over $200,000 ($250,000 for couples). This 3.8 percent is applied on top of your usual capital-gains tax rates, so it should be factored in to any potential sales you plan on making.
The new capital gains tax works like this: If you earn over $200,000 but under $400,000 as an individual, your effective long-term capital gains rate will now be 15 percent + 3.8 percent, or 18.8 percent. For those earning over $400,000 as individuals, the effective long term capital gains rate is now 20 percent + 3.8 percent, or 23.8 percent. Please note this calculation is for illustrative purposes only. In reality, every individual is different, and with deductions or other factors the actual amount of tax owed may vary.
Other tax changes in 2013 include a permanent inflation adjustment in the Alternative Minimum Tax and a 5 year extension on a number of individual tax credits, namely the Earned Income Tax Credit and the American Opportunity Tax Credit. Many people probably also noticed that their payroll tax contribution to Social Security went back up, after being reduced in 2010. If you’ve missed any estimated tax payments you might want to make note of this!
There are also several deductions being phased out after the 2013 tax year, meaning this might be the last year to grab the deduction unless they’re extended. These include remodeling your home to be more energy efficient (a $500 tax credit), buying an electric vehicle (a $7,500 tax credit for four-wheel vehicles), charitable contributions from your IRA, tax breaks for donating conservation property, commuter benefits, and teacher classroom expense deductions. The state and local sales tax exemption (for those who deduct sales tax paid instead of income tax) is also set to expire, though it seems unlikely that it won’t be extended. For more information, take a look at this Forbes article, which describes a few of the potentially expiring deductions in detail.
Ask for Help!
As always, I recommend speaking to a qualified professional who can help you with tax planning. Changes and new rules can be confusing, and an advisor could help you navigate the possibilities so that you can keep your tax bill correct and efficient.
How have the 2013 tax changes affected you? Has there been anything particularly challenging in your tax planning this year?
photo credit: Alan Cleaver via photopin cc
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Written by Bradford Pine
Bradford Pine Wealth Group – New York City Financial Advisors
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