Joel Peck is a Certified Public Accountant with over 25 years of experience. He has developed his expertise serving closely held businesses and their owners. Joel also teaches other CPAs to cross-sell new services to their clientele.
As a member of the National Association of Certified Valuation Analysts, Joel is a resource for issues affecting the value of gifts and estates and operating businesses. Through his training as a valuation expert, Joel consults with business owners looking to make their businesses more valuable as an element of their exit strategy. In addition, he advises other CPAs on ways to bring the importance of valuation and forming an exit strategy to their clients.
It is clear that tax planning for 2013 has already begun. Also clear is that we will not be able to use the "Same as Last Year" method because of all of the tax law changes that are in effect in 2013.
Knowing the laws is only part of the solution. We need your input about your specific issues in order to do the best tax planning. While we visit our business clients regularly, we get information from too many of our personal tax clients only once a year. The best tax planning happens all through the year as situations arise and savings opportunities become available. Stay in touch.
Here are the highlights of the most significant changes. Please contact us to help you plan for specific changes to your withholdings, calculation of estimated taxes (the first quarter's payment is due April 15) and other tax planning ideas.
Higher Medicare Tax on Earned Income
The first change most people will notice is the 2% rise in the employees' share of Social Security tax on earned income (wages and self-employment income) up to $113,700. Also affecting earned income is a 0.9% Medicare surtax that was passed in 2010 as part of health care reform (with an effective date of 2013) on earned income above $250,000 ($200,000 for singles and heads of household).
New Medicare Tax on Investment Income
There is an additional 3.8% Medicare surtax on net investment income (interest, dividends, capital gains, annuity income, passive rental income, royalties) that is another aspect of health care reform.
Earnings Limit Rises for Those Collecting Social Security
Individuals who turn 66 in 2013 do not lose any benefits if they make $40,080 or less. Those aged 62-66 by the end of 2013 can make up to $15,120 without having their Social Security benefits reduced. There is no earnings cap once a Social Security beneficiary turns 66.
Higher Tax Rates on the "1%" on Taxable Income
The item receiving the most attention is the addition of a 39.6% tax rate on taxable income above $450,000 ($400,000 for singles and $425,000 for heads of household).
Higher Tax Rates on the "1%" on Long Term Capital Gains and Dividends
For those with taxable income above $450,000 ($400,000 for singles and $425,000 for heads of household), the tax rate on qualified dividends and long-term gains increases to 20% from 15%. The new Medicare tax on investment income is in addition to this 20% tax rate.
Deductibility of Medical Expenses is Reduced
Beginning in 2013, medical expenses are only deductible to the extent they exceed 10% of adjusted gross income (up from 7.5%). The 7.5 percent threshold continues through 2016 for taxpayers aged 65 and older
Itemized Deductions and Personal Exemptions are Phased Out
To the extent that adjusted gross income exceeds $300,000 ($250,000 for singles and $275,000 for heads of household), deductions and exemptions will be reduced and could be eliminated.
Education Deductions and Credits are Extended and Broadened
The American Opportunity Tax Credit and Lifetime Learning Credit were extended to the end of 2017. The deduction for interest paid on student loans no longer has a maximum amount or a time limit. The deduction of up to$4,000 for qualified tuition expenses (regardless of whether you itemize deductions) has returned. The tuition deduction still cannot be used with other education tax benefits. The deductions for interest on education loans and tuition are both phased out at higher incomes.
Higher Tax Rate on Estates and Gifts - No Change to the Lifetime Exclusion
The maximum tax rate on estates and gifts rises to 40% (up from 35% in 2012). For an estate of any decedent during calendar year 2013, the basic exclusion amount is $5,250,000. The annual exclusion for gifts increases to $14,000 per done (up from $13,000 in 2012).
Other Notable Changes
Contribution limits for 401(k), 403(b), most 457 plans, SIMPLE retirement plans, IRAs and Roth IRAs were increased.
The income tax exclusion of up to $2 million of forgiven home mortgage debt was revived for 2013.
Healthcare reform had its effect on Health Savings Accounts (HSAs), Medical Savings Accounts (MSAs) and high deductible health plans (HDHPs).
Changes were made to the Adoption Credit and Earned Income Tax Credit.
The Child and Dependent Care Credit was permanently extended.
More changes are sure to come. Stay in touch.
Best wishes for a prosperous 2013!
A 39.6% rate now applies to taxable income over $400,000 for singles, $425,000
for heads of household and $450,000 for married couples filing a joint return.
The 2013 standard deductions rise a bit. Marrieds get $12,200. If one spouse
is age 65 or older…$13,400. If both are…$14,600. Singles can claim $6,100...$7,600
if they’re 65. Household heads get $8,950 plus $1,500 more once they reach age 65.
Blind people receive $1,200 more ($1,500 if unmarried and not a surviving spouse).
High-incomers resume losing some of their itemized deductions for 2013.
Their write-offs are slashed by 3% of the excess of AGI over $250,000 for singles,
$275,000 for household heads and $300,000 for marrieds. But the total reduction
can’t exceed 80% of itemizations. Medicals, investment interest, casualty losses
and gambling losses (to the extent of winnings) are exempted from this cutback.
Personal exemptions increase to $3,900 for filers and their dependents.
But this write-off is phased out for high-incomers once again. It is cut by 2%
for each $2,500 of AGI over the same thresholds for the itemized deduction phaseout.
The top rate on capital gains and dividends rises to 20% for high-incomers...
singles with taxable income above $400,000 and couples over $450,000.
The Medicare surtax can boost the rate to 23.8%. For others, a 15% rate applies,
but filers in the 10% or 15% tax bracket can still qualify for the special 0% rate.
The AMT exemptions are going up for 2013. They jump to $80,750 for couples
and $51,900 for both singles and household heads, up from 2012 by $2,050
and $1,300, respectively. The exemptions will automatically increase in future years,
based on the rate of inflation. Also, personal tax credits, such as those for tuition
and dependent care, will continue to offset alternative minimum tax liability.
Marrieds: If taxable income is... The tax is
Not more than $17,850 10% of taxable income
Over $17,850 but not more than $72,500 $1,785.00 + 15% of excess over $17,850
Over $72,500 but not more than $146,400 $9,982.50 + 25% of excess over $72,500
Over $146,400 but not more than $223,050 $28,457.50 + 28% of excess over $146,400
Over $223,050 but not more than $398,350 $49,919.50 + 33% of excess over $223,050
Over $398,350 but not more than $450,000 $107,768.50 + 35% of excess over $398,350
Over $450,000 $125,846.00 + 39.6% of excess over $450,000
Singles: If taxable income is ... The tax is
Not more than $8,925 10% of taxable income
Over $8,925 but not more than $36,250 $892.50 + 15% of excess over $8,925
Over $36,250 but not more than $87,850 $4,991.25 + 25% of excess over $36,250
Over $87,850 but not more than $183,250 $17,891.25 + 28% of excess over $87,850
Over $183,250 but not more than $398,350 $44,603.25 + 33% of excess over $183,250
Over $398,350 but not more than $400,000 $115,586.25 + 35% of excess over $398,350
Over $400,000 $116,163.75 + 39.6% of excess over $400,000
Household heads: If taxable income is... The tax is
Not more than $12,750 10% of taxable income
Over $12,750 but not more than $48,600 $1,275.00 +15% of excess over $12,750
Over $48,600 but not more than $125,450 $6,652.50 + 25% of excess over $48,600
Over $125,450 but not more than $203,150 $25,865.00 + 28% of excess over $125,450
Over $203,150 but not more than $398,350 $47,621.00 + 33% of excess over $203,150
Over $398,350 but not more than $425,000 $112,037.00 + 35% of excess over $398,350
Over $425,000 $121,364.50 + 39.6% of excess over $425,000