At this time of year most of us are focused on the holidays. We’ve got gifts to buy and meals to plan, family gatherings to enjoy and parties to attend—who has time for taxes? But if your inner Scrooge is eager for a year-end retrospective, there could be a few spare moments you haven’t considered. While waiting in line for photos with Santa, how about calling your C.P.A.? On that long drive to Grandma’s house, forego the sightseeing and review your retirement plan. Or google ‘Affordable Care Act’ while the family trims the tree. The holidays offer innovative ways to catch up on the new tax laws and save.
*see the Glossary located at the end of the article for useful tax terms bolded throughout the article
[dropcap]M[/dropcap]elanie Johnson, partner at Dixon Hughes Goodman (the largest CPA firm based in the Southern United States) is way ahead of the game. With over 15 years at Dixon Hughes Goodman, she begins thinking about year-end planning right after tax season. “At that time clients may update me that this year will be different for them,” Johnson explains. “Perhaps they are planning to sell their house or expand their business.” With plenty of lead-time she can help them strategize choices that optimize their situation in light of current tax laws.
But many of us don’t know what the year ahead will bring, and as daylight dwindles and holiday decorations appear, we may wonder if we’ve waited too long. Turns out there are many things we can do before New Year’s Eve is upon us.
Ghost of Tax Year Present
David Hylton of Carter, P.C., a North Carolina based accounting and consulting firm, has 21 years of experience advising small to medium-sized businesses and their owners. He sees 2013 as having more changes than usual. “One reason is that last December with the concerns over the fiscal cliff, the new tax bill was pushed into January of 2013,” Hylton says. “Additionally, elements of the Affordable Care Act didn’t kick in until this year.” After finishing up all the firm’s clients on extensions, due October 15, Hylton barely got a breather before launching into their year-end campaign. “We try to get in front of a lot of our clients so there are no surprises. It’s all hands on deck,” Hylton admits.
Wondering what all the fuss is about? Here’s a breakdown of new taxes and rates for 2013.
NEW TAXES AND RATES
Two new taxes are in effect for 2013: the 3.8 percent Net Investment Income (NII) surtax and the 0.9 percent Additional Medicare Tax. The 3.8-percent NII surtax very broadly applies to individuals, estates and trusts that have certain investment income above set threshold amounts. These amounts include a $250,000 threshold for married couples filing jointly and a $200,000 threshold for single filers.
One strategy to consider is to keep, if possible, income below the threshold levels for the NII surtax by spreading income out over a number of years, or finding offsetting above-the-line deductions. If you are considering the sale of your home, and the proceeds will exceed the home sale exclusion, it’s best to contact your tax advisor to discuss any possible NII surtax.
The Additional Medicare Tax applies to wages and self-employment income above threshold amounts, including $250,000 for married couples filing joint returns and $200,000 for single individuals.
If you have not already reviewed your income tax withholding for 2013, now is the time to do it. One way to reduce the sting of any Additional Medicare Tax liability is to withhold an additional amount of income tax.
American Taxpayer Relief Act, or ATRA, extended the Bush-era tax rates for middle and lower income individuals. However, ATRA also revived the 39.6 percent top tax rate. For 2013, the starting points for the 39.6 percent bracket are $450,000 for married couples filing jointly and surviving spouses, $425,000 for heads of households, $400,000 for single filers, and $225,000 for married couples filing separately. ATRA also revived the personal exemption phase-out and the limitation on itemized deductions for higher income individuals.
Starting in 2013, ATRA also sets the top rate for capital gains and dividends at 20 percent. This top rate aligns itself with the levels at which the new 39.6 percent income tax rate bracket starts: capital gains and dividends to the extent they would be otherwise taxed at the 39.6 percent rate as marginal ordinary income will be taxed at the 20 percent rate. ATRA did not change the application of ordinary income rates to short-term capital gains. However, individuals should plan for the possibility of being subject to a higher top rate (39.6 percent).
Upper-income folks will bear the brunt of the negative changes, but unusual circumstances could expose anyone to the new laws. “For example, perhaps you inherited a stock that you sell this year, or perhaps you have a piece of land that you are able to sell for a large gain,” Hylton explains, “a lower income individual that experiences such a windfall this year may be bumped into an income level that differs greatly from their historical income.” But the tax laws do not consider income history. “Even if you disagree with the argument, at least it seems more understandable that those with high incomes should pay more tax,” Hylton says. “People do get caught in this situation and I wish it wasn’t the case.”
In addition, the United States Supreme Court ruled that Section 3 of the Defense of Marriage Act was unconstitutional. As a result, all legally married same-sex couples will be treated as married for federal tax purposes.