Part 1: New Tax Rules, Hikes and Strategies for 2013

by | 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%

THE NEW AMERICAN TAXPAYER RELIEF ACT: HOW MUCH RELIEF IS IN IT FOR YOU?

by | 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.