Red Alert
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Palm Beach (561) 655-8700
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New Tax Changes for 2013

  1. For most taxpayers with modified adjusted gross income (MAGI) under $200,000—$250,000 for married couples filing jointly—marginal income tax rates won’t increase, and most tax relief provisions remain in effect. Among them: marriage penalty relief, the child tax credit, the American Opportunity Tax Credit, and lower capital gains tax rates. 
  2. The alternative minimum tax (“AMT”) exemption is permanently patched (with inflation adjustments), thereby sparing millions of middle-income Americans from the AMT’s snare. In 2013 the AMT exemption is $51,900 for single filers and $80,800 for joint filers, up from $50,600 for single filers and $78,750 for joint filers in 2012. 
  3. Qualifying municipal bond interest remains free of federal income taxes. 
  4. Qualified dividends continue to be taxed at preferential capital gains rates, rather than as ordinary income. 
  5. The employee share of payroll taxes will return to its 2010 level of 6.2% on the Social Security wage base, ending the 2011 and 2012 2% tax holiday. 
  6. People with MAGI greater than $200,000—$250,000 for couples—may be impacted by a new Medicare surtax on net investment income. Taxpayers with earned income above $200,000—$250,000 for couples—will also pay a higher Medicare payroll tax.  
  7. Anyone with an AGI above $250,000—$300,000 for married couples filing jointly—may have their personal exemptions and itemized deductions reduced.  
  8. In addition, taxpayers with taxable income greater than $400,000—$450,000 for couples—should get ready for a new 39.6% top marginal income tax rate and higher qualified dividend and long-term capital gains rates. 

The bottom line: If your modified adjusted gross income is below $200,000 (single filer), you’ll probably feel the biggest impact from the higher payroll taxes. If you make more than $200,000 (single filer), you may see additional taxes kick in, depending on your exact level of income. If you are impacted by these other tax changes, the combination of higher rates and reduced deductions could take a significant bite out of your income. So, it may be all the more critical for upper income people to focus on strategies to manage their taxes effectively.

Income greater than $200,000—$250,000 married filing jointly

The year 2013 will have several new wrinkles for individuals with incomes above $200,000—for couples, $250,000—higher Medicare payroll taxes, the new Medicare surtax on net investment income, and the phaseouts of itemized deductions and the personal exemption.

Medicare payroll and net investment income taxes 

The healthcare law included two new taxes that were scheduled to take effect in 2013. These taxes were not repealed as part of the fiscal cliff deal, and will kick in this year as expected. 

The Medicare payroll tax

Here is what’s changing. In 2012, the Medicare payroll tax was 2.9%. It applied only to earned income, which includes wages you are paid by an employer, plus tips. Your share, 1.45%, was deducted automatically from your paycheck. Your employer kicked in the other 1.45%.

In 2013, high-wage earners will owe an additional 0.9% on earned income above $200,000 (single filers) or $250,000 (married filing jointly). So, for example, if you are a single filer whose salary will be $225,000 in 2013, you will pay a 1.45% Medicare tax on the first $200,000, then 2.35% (1.45% plus 0.9%) on the next $25,000. Your employer will be required to withhold the extra 0.9% once your wages pass the $200,000 threshold for individuals.

The Medicare surtax on net investment income

A 3.8% surtax will be due on the lesser of your net investment income for the year, or the amount by which your “modified adjusted gross income”—or MAGI—exceeds those income thresholds. Note that you could be subject to both the additional 0.9% tax on earned income and this 3.8% tax.

Here is a hypothetical example: married taxpayer adjusted gross income is $372,000, of which $330,000 is wages and $42,000 is net investment income. Their adjusted gross income is $122,000 over the $250,000 threshold for married couples filing jointly. They'll incur the 3.8% tax on their $42,000 of net investment income, because it is less than the amount they are over the adjusted gross income threshold ($122,000). They’ll also owe 0.9% on the $80,000 that their wages are over the $250,000 earned income threshold for married couples filing jointly. Their total Medicare tax surcharge will be $2,316, which includes $1,596 (3.8% of $42,000) and $720 (0.9% on $80,000).

The personal exemption and itemized deduction phaseouts 

Single filers with adjusted gross income (AGI) in excess of $250,000 or couples who are married filing jointly and have AGI in excess of $300,000 will also face phaseouts of their deductions and personal exemptions. The phaseout of the personal exemption (sometimes called “PEP”) means for every $2,500 of AGI (or portion thereof) above $250,000 ($300,000 for married couples filing jointly), the $3,900 per-person personal exemption will be reduced by 2%. For married couples, personal exemptions will be fully phased out once their AGI exceeds $422,501, or for single filers if AGI exceeds $372,501.

The phaseout of itemized deductions (often called the “Pease” phaseout, for the legislator who sponsored the rule) could also raise tax bills for higher income earners by reducing the tax benefit of the mortgage interest, state income and sales tax, home office, and certain other itemized deductions. The Pease limitation reduces the value of itemized deductions by 3% of the AGI above $300,000 for couples, and $250,000 for single filers—to a maximum reduction of 80% in value. Itemized deductions for certain medical expenses, investment interest, and for casualty, theft, or gambling losses are exempt from the phaseout.

Taxable income above $400,000—$450,000 for couples

In addition to the higher taxes described above, upper-income Americans may be subject to a new 39.6% marginal rate on taxable income over $400,000 or $450,000 for married couples filing jointly. Likewise, they may be subject to tax on capital gains and qualified dividends at a rate as high as 20%—23.8% if the Medicare surtax on net investment income applies.

If you have any questions regarding pending legislation or its impact on your year-end tax planning, please do not hesitate to contact HAFER Certified Public Accountants and Consultants at (561) 655-8700 in Palm Beach, (239) 353-8700 in Naples, (786) 209-3400 in Miami, and (321) 445-5055 in Orlando, Florida.

Palm Beach, Florida
249 Royal Palm Way
Suite 300
Palm Beach, FL 33480
Phone: (561) 655-8700
  Naples, Florida Office
649 Fifth Avenue South
Suite 200
Naples, FL 34102
(239) 353-8700
  Miami, Florida Office
1200 Brickell Avenue
Suite 1950
Miami, FL 33131
(786) 209-3400
  Orlando, Florida Office
121 South Orange Avenue
Suite 1500
Orlando, FL 32801
(321) 445-5055