For some taxpayers, the chickens come home to roost for tax year 2013. Two laws—the American Taxpayer Relief Act of 2012 and the Patient Protection and Affordable Care Act of 2010—mandate higher taxes for top earners. But even some with modest incomes could be affected.
The 2012 law—signed on Jan. 2 of this year—set a new top federal income tax rate of 39.6 percent on adjusted gross income (AGI) starting at $450,000 for couples and $400,000 for unmarried individuals. It also boosted the maximum capital gains rate to 20 percent from 15 percent. Couples and surviving spouses with AGI over $300,000 and unmarried individuals with AGI above $250,000 will also see their itemized deductions and personal exemptions gradually phased out as their incomes rise.
And for individuals with annual incomes above $200,000 per year and couples with incomes above $250,000, the Affordable Care Act added a Medicare payroll tax of 0.9 percent, and a 3.8 percent unearned income tax on income sources including interest, dividends, capital gains, passive income, and rental or royalty income.
Taxpayers earning less might not be immune. If, for instance, this year you sell a home that appreciated a lot in value, you’ll pay the higher capital-gains taxes on net profit that exceeds $500,000 for couples and $250,000 for individuals. (The new 3.8 percent tax applies only to profits above those limits.) And if you expect dividends to be as high this year as last, you might be disappointed. Anticipating higher tax rates, many companies paid out more than usual in dividends in 2012. “The dividends that go out this year won’t be nearly as great,” says Brad Hall, a certified public accountant and a managing director at Hall & Co., an accounting firm in Irvine, Calif.
Partners in same-sex marriages might get windfalls by year-end because their employers must reimburse them for inflated health-insurance premiums and taxes they paid in 2013 before the Supreme Court nullified a portion of the Defense of Marriage Act. The Internal Revenue Service, which in September said it would honor all same-sex marriages, has offered employers different options on how to repay that money; ask your human-resources department.
Some temporary tax breaks—such as the option to deduct either state income or sales tax—may not survive past 2013. But other aspects of tax planning could become easier. The 2012 law made permanent some temporary tax provisions and clarified others. The law set new estate-tax rates and income floors for the Alternative Minimum Tax, indexed for inflation.
In this relatively stable tax environment, it’s easier to use established strategies, such as deferring income and accelerating deductions, says Mark Steber, senior vice president and chief tax officer at Jackson-Hewitt Tax Service in Parsippany, N.J.
Contribute as much as possible to a tax-deferred 401(k) or individual retirement account to shrink taxable income, says Gregg Wind, CPA, of Wind and Stern, an accounting firm in Los Angeles. The maximum IRA contribution for 2013 is $5,500 ($6,500 with the catch-up provision). Contributions to 401(k)s are capped at $17,500 (or $23,000 if you’re catching up).
Sell losing investments to harvest losses, but only if the fundamentals no longer make sense in your portfolio. Prepay property taxes and education expenses before Dec. 31 to maximize deductions and tax credits. (Exception: If you expect to pay the AMT, you won’t get a tax deduction for prepaying property taxes.) Those 70½ and older can still take advantage of a temporary rule that allows individuals to contribute up to $100,000 to a charity from their IRAs, sidestepping income tax on the withdrawal. So think about being generous.
—Tobie Stanger
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