As we wind down 2011, we are already beginning to take a look at 2013 with tax planning in mind. Why? Absent any legislative tinkering to the tax code in this upcoming election year, nearly all taxpayers can expect a big tax hike beginning in 2013. Here is a rundown of just a few changes that will result in heftier tax bills:
A return of pre-2001 individual income tax brackets and rates
An increase in capital gains tax rates from 15% to 20%
An increase in dividends tax rates from 15% to rates up to 39.6%
A sharp decline in the ability of businesses to claim first-year deductions for capital purchases
In addition to these changes, 2013 marks the first year of the Medicare surtaxes created by last year’s healthcare reform legislation. These surtaxes apply to wages, income from self-employment and investment income of taxpayers whose income exceeds certain threshold amounts. Here is how these taxes work.
This .9% surtax applies to wages and income from self-employment in excess of $250,000 for married taxpayers filing a joint return ($200,000 for single taxpayers). Employers are required to withhold the surtax tax once an employee’s wages exceed $200,000 (regardless of whether or not the spouse is also a wage earner.) Any additional surtax liability must be taken into account by quarterly estimated tax payments or by the original due date of the return.
Example: One spouse has wages of $275,000; the other spouse has wages of $125,000. They file a joint return. The total liability for the wage surtax is $1,350 [($400,000 – $250,000) x .9%]. Wage withholding represents $675 of that liability ($75,000 x .9%) while the remainder is due either as a component of estimated tax payments or by the original due date of the return.
One additional note to consider is that self-employed individuals that generally get an income tax deduction for one-half of self-employment taxes paid will receive no such deduction for Medicare surtaxes paid on income from self-employment.
The investment surtax is a 3.8% tax applied to the lesser of investment income and adjusted gross income over $250,000 for married taxpayers filing a joint return ($200,000 for single taxpayers).
Example: A married couple files a joint return with $350,000 in income, $75,000 of which is derived from investments. The income exceeding the threshold amount is $100,000. Since investment income is less than $100,000, the 3.8% tax rate is applied to $75,000 of investment income for a Medicare surtax of $2,850.
Here is a list of income subject to the investment surtax:
Taxable capital gains
Some of this income, such as capital gains, may be triggered in 2011 and 2012 in order to dodge the surtax. Also, bear in mind that while the capital gain exclusion from the sale of a primary residence also serves to exclude the investment surtax, any gain that exceeds the exclusion amount ($500,000 for married taxpayers filing a joint return/$250,000 for single taxpayers) will be subject to capital gains tax and the investment surtax.