2013 tax planning – Already?

As you begin to contemplate preparing your 2012 tax returns, it is never too early to begin planning for your 2013 tax returns. There are significant changes on the horizon for 2013, not only as a result of the taxes found in the Affordable Care Act, but also as a result of the recently passed 2012 American Taxpayer Relief Act.

The Affordable Care Act gives us two new taxes with which to contend. The first is a 0.9% Medicare tax on wages and self-employment income above $250,000 for married persons filing jointly, $200,000 for single persons and $125,000 for married persons filing separately. The tax applies to any income that is subject to the Medicare tax. Dual income couples need to be aware that the 0.9% additional Medicare Tax can apply to them even if neither earns more than $250,000 in wages if the couple’s combined wages exceed $250,000. (A similar issue can arise where an individual works more than one job.) A couple in this position could be in for a nasty surprises (e.g. additional taxes and penalties) when filing their 2013 tax returns if changes are not made in the amount they have withheld.

The second Affordable Care Act tax is the 3.8% Net Investment Income Tax that applies to the lesser of net investment income or modified adjusted gross income exceeding $250,000 for married persons filing jointly, $200,000 for single persons and $125,000 for married persons filing separately.

Investment income that is subject to this tax includes taxable interest, dividends, rents and royalties, capital gains, and passive income such as S corporation income or partnership income where the taxpayer does not materially participate in the operations. Municipal bond interest, distributions from individual retirement accounts and distributions from retirement plans are not subject to the 3.8% Net Investment Income Tax.

Among the tax increases found in the 2012 American Taxpayer Relief Act are the following:

  • • The maximum tax rate on long term capital gains and qualified dividends has been increased from 15% to 20%. If the Net Investment Income Tax applies, the maximum tax rate for long term capital gains and dividends is increased to 23.8%.
  • • A 39.6% marginal tax rate applies to taxable income in excess of $450,000 for married couples filing jointly, $400,000 for single individuals, and $225,000 for married individuals filing separately. These amounts are to be adjusted for inflation.
  • • The personal exemption that a taxpayer can claim for themselves, their spouses and their dependents is phased out at adjusted gross income in excess of $300,000 for married couples filing jointly, $250,000 for single individuals, and $150,000 for married couples filing separately. The personal exemptions are phased out at a rate of 2% for every $2,500 earned above the threshold amounts.
  • • Itemized deductions are also phased out for single individuals with $250,000 of adjusted gross income, and married individuals with $300,000 of adjusted gross income. The total itemized deductions are reduced by 3% of the amount by which a taxpayer’s adjusted gross income exceeds the threshold amounts. Total itemized deductions can be reduced by up to 80% depending upon one’s adjusted gross income.

There is some good news on the tax front from the 2012 American Taxpayer Relief Act. Under the Act, the $500,000 Section 179 expense limitation has been extended to 2013, as has 50% bonus depreciation for property placed in service during 2013.

Also, it is still possible for individuals over age 70 1/2 to make up to $100,000 of charitable contributions from their individual retirement accounts in 2013 on a tax free basis if the contributions are made direct from the individual retirement account to the charity.

It may be too late to take steps to save on 2012 taxes, but there is no time like the present to begin 2013 tax planning.