This is the perfect time to think about taxes. Not that anyone really wants to think about taxes. But once Dec. 31 comes, you won’t be able to do anything about the sticker shock you’re probably in for in April.
“Tax planning is essential for 2013. The effective tax rates for 2013 can be really high,” says Gail Rosen, a Martinsville-based certified public accountant. Here’s the good, the bad and the ugly of what’s coming.
1. If you earn more, you’ll pay more
Singles and heads of household who earn more than $200,000, and those married filing jointly and earn more than $250,000, will see higher taxes.
There’s the Medicare surtax of 0.9 percent. “If you are married and earn $250,000 combined, you pay another $900 in Medicare tax,” Rosen says.
Then there’s a 3.8 percent Medicare tax on net investment income. “The new 3.8 percent tax is imposed on the lesser of net investment income or the amount your income exceeds the limits mentioned above,” Rosen says.
“Therefore, if a couple earns $300,000 in wages and has $100,000 in capital gains, they will pay an additional Medicare tax of $3,800 to $100,000 times 3.8 percent.” Net investment income includes interest, dividends, rents, royalties, capital gains and annuities, she says, but not pension or IRA distributions.
2. You’ll pay more, even if you earn less
For two years, workers had a break on Social Security taxes on their wages, down to 4.3 percent from 6.2 percent. Kiss that goodbye for 2013. You’re back to paying the full 6.2 percent.
3. Earn more, deduct less
2013 brings a reinstatement of provisions that expired in 2009. If your adjusted gross income is more than $250,000 for singles, $275,000 for heads of household or $300,000 for marrieds filing jointly, you can’t deduct as much as you used to.
High earners lose 3 percent of itemized deductions, Rosen says, but the total reduction cannot exceed 80 percent of total itemized deductions. If you’re married with income of $400,000 and itemized deductions of $50,000, you lose $1,500 of those deductions.
Personal exemptions are also slashed. “Personal exemptions allow $3,900 per person to be exempt from tax for 2013,” she says. “This write-off is cut by 2 percent for each $2,500 of adjusted gross income over these income limits.”
4. If you earn more, you’ll be taxed more
The top tax rate is now 39.6 percent for singles who earn more than $400,000, heads of household who earn more than $425,000 and marrieds who earn more than $450,000. Those high earners also see an increase in their rate on capital gains and qualified dividends, up from 15 percent to 20 percent.
5. Good news for parents
Some tax credits enjoyed by parents have been extended through 2017. The Child Tax Care Credit, the Earned Income Tax Credit and the American Opportunity Tax Credit live on. And the Child and Dependent Care Tax Credit was made permanent.
6. Good news for savers
If you have cash left after paying your taxes, save for retirement in 2013.
“IRA contributions went from $5,000 — or $6,000 for those over age 50 — to $5,500, or $6,500 for those over age 50 in 2013,” says Michael Maye, a certified financial planner and certified public accountant with MJM Financial Advisors in Berkeley Heights. Contributions for 401(k) also are higher, up to $17,500, or $23,000 for those older than 50.
7. Bad news on medical deductions
The threshold to deduct medical expenses has risen from 7.5 percent to 10 percent for taxpayers younger than 65. Those who turn 65 in 2013 can still use the 7.5 percent floor, Rosen says.
What to do? Here are a few strategies to lower taxes
Muni bonds: Municipal bonds can be smart for high earners, Maye says. “They are typically federal income tax-free, and they also are excluded from net investment income when calculating the new 3.8 percent Medicare surtax,” he says.
Offsetting: In taxable accounts, sell losers to offset capital gains.
Bunching: Bunch together medical deductions and miscellaneous itemized deductions, Rosen says, but before you do, make sure you’re not subject to the Alternative Minimum Tax.
Think charitably: Those older than 70 may direct required minimum distributions (RMDs) directly to charity via a qualified charitable distribution (QCD). “The beauty of doing this is the RMD is not included in the individual’s income but still counts for RMD distributions purposes,” Maye says.
Donate stock: If you give highly appreciated securities instead of cash, Maye says, you can take the fair market value as an itemized deduction and avoid reporting the capital gain as income.
Talk to your employer: Arrange tax-free compensation, such as deferred pay arrangements and dependent care benefits, Rosen says. This may help avoid the thresholds for the 3.8 percent and the 0.9 percent taxes.