2013 Tax Changes
It's time, once again, for a review of the upcoming income tax changes for 2013.
New higher tax rates for upper-income individuals
For most individuals, the 2013 federal income tax rates are the same as for 2012: 10%, 15%, 25%, 28%, 33%, and 35%. However, the American Taxpayer Relief Act (ATRA) increased the maximum rate for 2013 to 39.6%. That rate only affects singles with taxable income above $400,000, married joint-filing couples with income above $450,000, and heads of households with income above $425,000.
For most individuals, the 2013 federal income tax rates on long-term capital gains and dividends are also the same as for 2012: either 0% or 15%. However, the ATRA raised the maximum rate for 2013 to 20% for singles with taxable income above $400,000, married joint-filing couples with income above $450,000, and heads of households with income above $425,000. Folks with 2013 taxable income below these levels will pay a 15% federal rate on long-term gains and dividends or 0% for gains and dividends that would otherwise fall within the 10% or 15% brackets.
New 3.8% Medicare surtax on investment income collected by upper-income individuals
Starting in 2013, all or part of your net investment income, including long-term capital gains and dividends, can potentially get socked with an additional 3.8% "Medicare contribution tax." As a result, the maximum federal rate on long-term gains for 2013 is actually be 23.8% (versus the 15% maximum rate that applied on your 2012 return). The new 3.8% Medicare tax only applies if your adjusted gross income (AGI) exceeds: (1) $200,000 if you're unmarried, (2) $250,000 if you're a married joint-filer, or (3) $125,000 if you use married filing separate status.
Specifically, the 3.8% Medicare tax hits the lesser of your net investment income or the amount of AGI in excess of the applicable threshold. Net investment income includes interest, dividends, royalties, annuities, rents, income from passive business activities, gains from assets held for investment like stocks and bonds, the taxable portion of personal residence gains, and income and income and gains from the business of trading in financial instruments or commodities,. (Income and gains from assets held for business purposes are not subject to the 3.8% tax.)
For example, a married joint-filing couple with 2013 AGI of $295,000 and $60,000 of net investment income would owe the 3.8% tax on $45,000 (the amount of AGI over the $250,000 threshold for joint-filers). If the same couple had AGI of $350,000, they would owe the 3.8% tax on $60,000 (the entire amount of their net investment income). To figure out if you owe the new 3.8% Medicare surtax, fill out IRS Form 8960 (Net Investment Income Tax).
New 0.9% Medicare surtax on salaries and self-employment income earned by upper-income individuals
Before 2013, the Medicare tax on salary and/or self-employment (SE) income was a flat 2.9%. If you're an employee, 1.45% was withheld from your paychecks, and the other 1.45% was paid directly by your employer. If you're self-employed, you paid the whole 2.9% yourself.
Starting in 2013, an extra 0.9% Medicare tax is charged on: (1) salary and/or SE income above $200,000 for an unmarried individual, (2) combined salary and/or SE income above $250,000 for a married joint-filing couple, and (3) salary and/or SE income above $125,000 for those who use married filing separate status. For self-employed individuals, the additional 0.9% Medicare tax hit comes in the form of a higher SE bill.
To discover whether you owe the new 0.9% Medicare surtax, fill out IRS Form 8959 (Additional Medicare Tax).
New personal and dependent exemption deduction phase-out rule for upper-income individuals
The last time we saw a phase-out rule for personal and dependent exemption deductions was back in 2009. Sadly, the phase-out deal is back for 2013 and beyond. As a result, your 2013 personal and dependent exemption write-offs might be reduced or even completely eliminated. Phase-out starts at the following adjusted gross income (AGI) thresholds: $250,000 for singles, $300,000 for married joint-filing couples, $275,000 for heads of households, and $150,000 for married individuals who file separate returns.
If you're covered by a retirement plan at work, and you are considering contributing to a tax-deductible traditional IRA, then the 2012 income phase-out limits start at $92,000 for joint filers (an increase of $2,000 from 2011), and increases to $58,000 for those with a filing status of single or head of household (an increase of $2,000 from 2011).