We hope everyone had a happy holiday season and we wish you a healthy New Year. The first of the year reminds us income tax returns will again be due very soon and we are here to help everyone transition into what we hope will be a successful filing season. The Internal Revenue Service has announced there will be a delay of approximately two weeks while they finalize forms and prepare their systems after recovering from the shutdown in October. All other deadlines remain the same so we encourage you to accumulate your information as you do every year. Congress enacted many changes which became effective in 2013 and others which are scheduled to expire unless Congress acts to extend them.
Tax breaks scheduled to expire after 2013 applicable to individuals:
the option to deduct State and local general sales taxes;
the above-the-line deduction for qualified tuition and related expenses;
and tax-free distributions from individual retirement plans for charitable purposes.
This year brought in the enactment of two new taxes. The Patient Protection and Affordable Care Act (PPACA) imposed an additional 0.9% Medicare tax on wages and self-employment income and a 3.8% net investment income tax. The 3.8% net investment income tax will apply in 2013 to single individuals with a modified adjusted gross income (MAGI) in excess of $200,000 and married taxpayers with an MAGI in excess of $250,000. Taxpayers with MAGIs below the $200,000/$250,000 thresholds will not be subject to the 3.8% tax. Higher income individuals will also be subject to an additional 0.9% HI (Medicare) tax. The additional Medicare tax means that the portion of wages received in connection with employment in excess of $200,000 ($250,000 for married couples filing jointly) will be subject to a 2.35% Medicare tax rate. The additional Medicare tax is also applicable for the self-employed.
Additionally, the threshold to claim an itemized deduction for unreimbursed medical expenses increased from 7.5% of adjusted gross income (AGI) to 10% of AGI effective in 2013. The PPACA provides a temporary exception for individuals (or their spouses) who are age 65 and older. This exception ends after 2017.
The 39.6% rate was reinstated and is effective for 2013 applying for income above a certain threshold. The applicable threshold for taxable income is $450,000 for joint and $400,000 for single filers. Capital gain and dividend rates also increased for higher-income taxpayers. The top rate for capital gains and dividends increased to 20% (up from 15%) for single taxpayers with incomes exceeding $400,000 ($450,000 for married taxpayers). The limitation (phase-out) on itemized deductions and personal exemptions, which had previously been suspended, is reinstated with a starting threshold for those making $300,000 for joint filers and $250,000 for single filers. The Act also provided permanent alternative minimum tax (AMT) relief. The Act permanently increased the AMT exemption amounts to $50,600 for unmarried taxpayers, $78,750 for joint filers and $39,375 for married persons filing separately.
All these changes, while incremental individually, can yield a hefty tax bill when combined. Our goal is to assist in any way we can to help alleviate any sticker shock from the additional taxes in 2013. Please do not hesitate to contact us if you have any questions or concerns as you begin working on your tax information this year.
Kraft & Company, PLLC