by The MDTAXES Network | Dec 16, 2013 | Uncategorized
During December, you should evaluate whether you’ll save any taxes by postponing 2013 income or deductions into 2014 or by accelerating 2014 income or deductions into 2013.? While many factors should be evaluated prior to making your final decision, a few items to keep in mind are as follows:
- For 2013, a single person will itemize once allowable deductions exceed $6,100 and a married couple will itemize once allowable deductions exceed $12,200.
- A taxpayer is no longer subject to Social Security or self-employment taxes once wages and net self-employment earnings exceed and $113,700 in 2013 and $117,000 in 2014.
- Miscellaneous itemized deductions, such as unreimbursed employee business expenses, are only deductible to the extent they exceed 2% of adjusted gross income (AGI). Items paid with credit cards are deductible in the year charged.
- Medical and dental expenses are deductible to the extent they exceed 7.5% of AGI, and are deductible in the year paid.
If you need assistance in determining whether you should either postpone or accelerate your income or deductions, or whether you?ll be hit by the AMT, please give us a call.
by The MDTAXES Network | Jun 13, 2013 | Planning, Taxes, Uncategorized
Tax hikes in 2013 mean it’s time to revisit available tax breaks.
Effective 1/1/13, taxes increased for many well-paid Americans. Here are three separate tax hikes that might affect you:
- Top federal income tax rate now 39.6%
- Top Medicare tax on earned income now 3.8%
- New 3.8% Medicare tax on unearned income
Beginning on January 1, 2013, The American Taxpayer Relief Act raised the top federal marginal income tax rates from the 35% max in place since the Bush 2003 tax cuts to 39.6% for taxable income exceeding the following thresholds:
Threshold for 39.6% Bracket:
|
Filing Status
|
Tax Bracket Starts
(at taxable income)
|
|
Married Filing Joint
|
$450k
|
|
Head of Household
|
$425k
|
|
Single
|
$400k
|
|
Married Filing Separate
|
$225k
|
So how much more federal income taxes could you expect to pay this year due to the 39.6% bracket? Single individuals with taxable income of $600k will pay the federal government an additional $9,200. Earn $400k more to bring your taxable income to $1 million, and the additional taxes you’ll owe jumps to $27,600. Let’s look at the increases based on the four filing statuses:
Additional Taxes Starting in 2013
|
Taxable income
|
Single
|
Head of Household
|
Married Filing Joint
|
Married Filing Separate
|
|
$600,000
|
$9,200
|
$8,050
|
$6,900
|
$17,250
|
|
$800,000
|
$18,400
|
$17,250
|
$16,100
|
$26,450
|
|
$1,000,000
|
$27,600
|
$26,450
|
$25,300
|
$35,650
|
Increased Tax Rate on Long-Term Capital Gains and Corporate Dividends
The top tax bracket was not the only increase to federal income taxes. For long-term capital gains and qualified corporate dividends, the tax rate increases by one-third – from 15% to 20% – based on the same taxable income thresholds as apply the 39.6% bracket, effective 1/1/13.
Higher Medicare Taxes:
There are two new increases to the Medicare tax. One upped the Medicare tax that you’ll pay on your earned income from 1.45% to 2.25% for single individuals earning more than $200k or married couples whose combined earned income exceeds $250k. Keep in mind that your employer will match Medicare taxes withheld from your pay at a rate of 1.45%, so the federal government now gets 3.8% on your earned income that exceeds the applicable threshold.
Increased Medicare Tax
|
Filing Status
|
3.8% Tax Starts
(Earned income)
|
|
Married Filing Joint
|
$250k
|
|
Single
|
$200k
|
New 3.8% Medicare Tax On Unearned Income:
The new 3.8% Medicare tax on unearned income kicks in at the $200k of Adjusted Gross Income (AGI) for single individuals and $250k of AGI for married couples. Unearned income includes interest, dividends, capital gains, annuities, royalties, and rents. This is the first time that unearned income has ever been subject to Medicare taxes.
Tax Rates for Capital Gains and Qualified Dividends ? 2012 vs 2013
|
Single
|
Married Filing Jointly
|
Capital Gains and Qualified Dividends -2012 rates
|
Capital Gains and Qualified Dividends -2013 rates
|
Increase in Tax Rates on Investments 2012 vs 2013
|
|
$0 – $36,250
|
$0 – $72,500
|
0%
|
0%
|
0%
|
|
$36,250 – AGI of $200,000
|
$72,500 – AGI of $250,000
|
15%
|
15%
|
0%
|
|
$200,000 – taxable income of $400,000
|
$250,000 – taxable income of $450,000
|
15%
|
18.8%
|
3.8%
|
|
$400,000+
|
$450,000+
|
15%
|
23.8%
|
8.8%
|
by The MDTAXES Network | Feb 20, 2013 | Uncategorized
By Michael Bohigian, EA
The American Taxpayer Relief Act of 2012 rescued the vast majority of Americans from the tax edge of the ?fiscal cliff? and the steep tax increases scheduled to kick in as the Bush tax cuts expired at the end of 2012. This legislation, however, did not entirely spare high-income earners. Here are the key provisions of the Act passed on the first day of 2013, how they may affect you, and strategies you can implement to minimize your tax burden under these new rules:
On The Income Side:
Top Marginal Rate Increases to 39.6%
Beginning on January 1, 2013, the Act raises the top federal marginal income tax rates from the 35% max in place since the Bush tax cuts to 39.6% for taxable income above the following thresholds: $400,000 for Single filers; $425,000 for Heads of Household; $450,000 for Married Filing Jointly and qualifying surviving spouses; and $225,000 for those Married Filing Separately. Translating this provision into real numbers, a married couple with $600k of taxable income will now pay just under $7,000 in additional federal income taxes in 2013 than they did in 2012, while an individual earning at the same income level will pay just over $9,000 more in federal income taxes.
Increase in Federal Income Taxes For 2013 Due To The 39.6% Tax Rate
| Taxable income |
Single |
Head of Household |
Married Filing Joint |
Married Filing ? Separate |
| $600,000 |
$9,200 |
$8,050 |
$6,900 |
$17,250 |
| $800,000 |
$18,400 |
$17,250 |
$16,100 |
$26,450 |
| $1,000,000 |
$27,600 |
$26,450 |
$25,300 |
$35,650 |
New Investment Tax Rates
Starting in 2013, the top tax rate for dividends and capital gains is permanently set at 20%, a whopping one-third increase from the top rate of 15% in place since 2003, starting at the same income levels as the 39.6% tax rates. The tax rate for dividends was set to revert to one?s marginal tax rate per the pre-2003 Bush rules, so the Act provides some relief to high-wage earners with substantial corporate dividend income.
Keep in mind that the Affordable Care Act enacted an additional Medicare tax of 3.8% on unearned income for married couples with adjusted gross income (AGI) over $250,000 and individuals with AGI over $200,000, effective January 1, 2013. Unearned income includes interest, dividends, capital gains, annuities, royalties, and rents.
Tax Rates for Capital Gains and Qualified Dividends ? 2012 vs 2013
| Single |
Married Filing Jointly |
Capital Gains and ? Qualified Dividends -2012 rates |
Capital Gains and ? Qualified Dividends -2013 rates |
Increase in Tax Rates ? on Investments 2012 vs 2013 |
| $0 – $36,250 |
$0 – $72,500 |
0% |
0% |
0% |
| $36,250 – AGI of ? $200,000 |
$72,500 – AGI of ? $250,000 |
15% |
15% |
0% |
| $200,000 – taxable ? income of $400,000 |
$250,000 – taxable ? income of $450,000 |
15% |
18.8% |
3.8% |
| $400,000+ |
$450,000+ |
15% |
23.8% |
8.8% |
If you?re concerned about paying higher taxes on the sale of your personal residence, please note that the first $500,000 of gain on your home for a married couple and $250,000 of gain for unmarried individuals is exempt from all taxes, including this 3.8% Medicare surtax, when your home qualifies for the residence gain exclusion. To qualify, you need to own your home and use it as your primary residence for two out of the five years prior to the date the home is sold.
Stay tuned for Part 2 – What’s Being Deducted from your Deductions
Michael Bohigian, EA, is a staff accountant atSchwartz & Schwartz PC with a MS in Accounting and an MBA from Boston College.
by The MDTAXES Network | Jan 24, 2013 | Commentary, Planning, Savings
We’re continuing with our series on New Year’s resolutions that you can do to improve your finances.? Be sure to read Part 1 for extra tips!
Pay Down Those Credit Cards
If you owe money on your credit cards, determine how much you can realistically afford to pay down during the year. For best results, try not to charge additional purchases on those cards while you’re trying to pay down what you owe. Download our (Microsoft Excel) debt/savings calculator to calculate how much you need to pay each month to pay off a debt.
Maximize Your 401(k) & 403(b) Plan Contributions
At work, you probably have the opportunity to save for your retirement through a 401(k) or 403(b) plan sponsored by your employer. The maximum annual contribution for 2013 has increased to $17,500. And anyone who will be 50 or older by December 31st can contribute an extra $5,500 this year. Remember, amounts contributed to these plans reduce your taxable compensation and grow tax deferred.
Unless you’re already on track to contribute the maximum to your 401(k) or 403(b) plan this year, now’s the time to instruct your employer’s benefit department to increase the percentage of your salary going towards this tax-advantaged retirement savings account.
And if you’re self-employed, set up a solo 401(k) plan or a SEP IRA plan as soon as possible, if you haven’t already done so, and try to contribute to these plans systematically over the year.
Contribute $5,500 to a Roth IRA
Roth IRAs are one of the few tax-free investments available to individuals. This year, you can contribute up to $5,500 to your Roth IRA. You won’t get a tax deduction, but amounts contributed grow tax-free, as long as certain conditions are met. Consider signing up with a mutual fund company to have $458.33 automatically transferred from your checking account into a Roth IRA each month.
Don’t forget, if you’re single and your adjusted gross income (AGI) exceeds $127,000 or married and your AGI exceeds $188,000, you’re not eligible to contribute to a Roth IRA that year. If your income exceeds the applicable threshold, you’re still eligible to contribute to a traditional IRA for that year. The amount contributed isn’t tax deductible if either you or your spouse is covered under a retirement plan at work, but grows tax-deferred. You can also convert your IRAs to a Roth IRA at any time under the current rules, no matter how high your income will be.
Take Advantage of the Tax-Free College Savings Opportunities
Money contributed to Education Savings Accounts (formerly Education IRAs) and 529 Plans grow tax-free, as long as any money withdrawn is used for tuition and certain other college expenses, or in the case of ESAs, for private elementary school or high school as well. You can contribute up to $2,000 per year per child into an ESA, and up to $14,000 per year, or frontload $70,000 at one time, into a 529 Plan, subject to certain restrictions. With tax rates on the rise, these tax-free opportunities become even more attractive to most taxpayers.
Avoid Resolution Pollution
Did you set so many financial goals that you’ll end up attaining none of them? If so, take this opportunity to restate your financial resolutions for 2013.
by The MDTAXES Network | Oct 5, 2012 | Taxes
On June 28th, the Supreme Court upheld most of the provisions of The Patient Protection and Affordable Care Act. Here are some of the tax increases that might affect you starting in 2013:
Increased and Expanded Medicare Taxes
High-income taxpayers will be paying higher Medicare taxes. Under the current rules, individuals have Medicare taxes withheld from their salaries at a rate of 1.45% on each dollar earned at work. Since employers match the amount withheld, Medicare receives a total of 2.9% for each payroll dollar paid out. And unlike Social Security taxes which max out at $110,100 (in 2012), there is no cap for Medicare taxes. Self-employed individuals also pay Medicare taxes at a rate of 2.9% on all of their net earnings.
Starting in 2013, the employee portion of the Medicare tax jumps by a whopping 62% – from the current rate of 1.45% to 2.35% – on earned income in excess of $200k for single individuals and $250k for married couples filing a joint tax return. As of now, the employer match is slated to remain at 1.45%, which means the total Medicare tax will be 3.8% for high-income taxpayers.
For example, if you’re single, and earn $500k from your job, expect to pay $2,700 in additional Medicare taxes (($500k – $200k) * .9%) for 2013.
For more information, check out the IRS’s Questions and Answers for the Additional Medicare Tax, which explains: The statute requires an employer to withhold Additional Medicare Tax on wages or compensation it pays to an employee in excess of $200,000 in a calendar year. An employer has this withholding obligation even though an employee may not be liable for the Additional Medicare Tax because, for example, the employee?s wages or other compensation together with that of his or her spouse (when filing a joint return) does not exceed the $250,000 liability threshold. Any withheld Additional Medicare Tax will be credited against the total tax liability shown on the individual?s income tax return (Form 1040).
To increase taxes for high-income individuals even more, the Medicare tax will also apply to unearned income for the first time since this tax was enacted. People over the $200k or $250k threshold should expect to pay Medicare taxes at a rate of 3.8% on interest, dividends, capital gains, and net rental income beginning in 2013. You will pay this tax in addition to any federal and state income taxes due on this income. We’ll provide you a link to this form when it becomes available.
Reduced Tax Breaks for Medical Expenses
Many employers offer their staff the ability to pay for their family’s healthcare costs with pre-tax dollars through a Flexible Savings Accounts (FSA) included as part of their benefits package. Starting in 2013, the maximum amount of money that you can set aside in an FSA will be cut in half to $2,500 per year. Plus, medical expenses you can pay through the FSA will exclude certain items currently allowed, including OTC medications. Please note, if you are married, both you and your spouse can put away the full $2,500 through your respective employer’s FSA.
The Patient Protection Act also makes it even tougher for individuals to deduct their medical expenses. Starting in 2013, you can only deduct your family’s medical expenses to the extent the allowable expenses exceed 10% of your adjusted gross income. That’s an increase of one-third over today’s threshold of 7.5% of AGI.
This new rule may not impact your taxes, however, thanks to the dreaded Alternative Minimum Tax (AMT). Since the current threshold for deducting medical expenses under the AMT is already 10% of Adjusted Gross Income (AGI), many people who are hit by this tax every year might not see any tax increase due to this change.
Steps to Consider to Minimize These Taxes:
As with most other tax rules, there are ways to minimize the tax bite that will be caused by soon to be implemented changes to the Tax Code:
- Take a look at a Health Savings Account for your family.?? Money contributed into an HSA is tax-deductible, and money withdrawn for your family’s medical expenses is tax-free. We wrote about HSAs in our?MDTAXES? May 2012?Newsletter.
- Consider?selling appreciated investments in 2012 if you would otherwise sell them in 2013. No one know whether the tax rate on long-term capital gains will be higher than 15% in 2013. Add to this the 3.8% Medicare tax you’ll pay once your income exceeds $200k if single or $250k if married, and you could save a decent amount of taxes by selling by December 31st.
- Consider accelerating income into 2012 to reduce your 2013 income. This strategy includes one-time income generators, such as Roth Conversions.
