Blog - 2013 Taxes: The Setting Sun


In the news, online, and at the heart of many of the public and political debates surrounding the upcoming elections, we’re all hearing a lot about taxes.   Kind of depressing, right? Phrases like “tax cuts expiring,” “sunset provisions,” “tax resets,” and “fiscal cliff” seem to haunt much of our media and conversation, and rightfully so as it is a very important issue.  But what does it really mean for you?

This month’s post is the first of a two part series covering, well, you guessed it – taxes, and specifically as they relate to 2013 and beyond.  This first part will explore the major changes that will affect individuals if the current law is continued.  The second part will touch on a number of tax planning strategies that can help minimize the impact of those changes if they do occur.

Below are seven upcoming tax changes that we feel are important to understand and consider as we near the end of 2012. 

1.      Alternative Minimum Tax (AMT) Exemption

The AMT was instituted as a sort of separate tax system that runs parallel to the normal tax system, but was designed to limit higher income individuals’ use of various deductions or exemptions and therefore, increase the tax they paid.  To help make sure that only higher income individuals/couples were hit with this tax, an exemption level was established.  The problem is that while wages have increased with inflation over the years, this AMT exemption does not have any built-in increase and so it has been given only temporary increases called “patches” each year.

In 2011, the AMT exemption for married couples was $74,450 and $48,450 for individuals, including the patch.  Currently, these exemptions lapse back for 2012 to $45,000 for married couples and $33,750 for individuals.  This is a significant change that translates into many individuals getting hit with the AMT that were previously well-sheltered through the exemption.

2.      General Rise In Tax Brackets

Come 2013, income tax brackets are set to rise for everyone.  A lot of focus has been placed on “high income earners” which typically refers to couples earning more than $250,000 or individuals earning more than $200,000.  However, this particular set of changes will affect virtually all.

The table below illustrates how the rates are set to increase in 2013 as compared with 2012.  The basic summary here is that the income tax rates will increase by 3 – 5 percentage points in each bracket.

2012 Rates

Corresponding Rate in 2013

10%

15%

15%

15%

25%

28%

28%

31%

33%

36%

35%

39.6%

3.      Capital Gains Rates

In recent years, 2012 included, we have been enjoying a long-term capital gains rate of 15%, and a 0% rate for those in the two lowest ordinary tax brackets.

2013 long-term capital gains rates are scheduled to increase to 20%, 10% for those in the lowest ordinary tax bracket.    There is also a reinstatement of what is called an “ultra-long-term” capital gains rate of 18%, 8% for those in the lowest bracket.  This special rate applies to capital gains on investments bought after January 1, 2001 and held for 5+ years.

4.      Qualified Dividends

Certain qualifying dividends have been taxed very favorably at the long-term capital gains rates of 15%, 0% for those in the lowest two tax brackets.  If you were to check your 2010 or 2011 tax return, it is very likely that you have been taking advantage of these low rates on some or all of your investment dividend income.

In 2013, the provision for qualified dividends is set to lapse, meaning that all dividends will be taxed at ordinary income rates just like wages or other business income, as high as 39.6%!  For those with a low ordinary tax rate, this change may not make much of an impact, but for those in the higher brackets, it is a significant increase.

5.      Personal Exemption & Itemized Deduction Phase-outs

In the past, high income individuals and couples had to reduce their personal exemptions and itemized deductions by a percentage of their income over certain thresholds.  This is called a phase-out.  Only recently were these phase-outs completely done away with for everyone.

In 2013, these phase-outs are back and are projected to affect those with income greater than $174,450.  The net result for those affected by the increase is typically to add an additional 1-3% to your highest tax bracket’s rate.  The actual addition in tax this causes is dependent on one’s income and how large the family is.

6.      Lapse of Social Security ‘Holiday’

In 2011 and 2012, employees have been enjoying a reduction in the social security tax withholding on their paychecks.  The holiday moved what was 6.2% of withholding down to 4.2%.

In 2013, this holiday is set to lapse with the withholding rate returning to 6.2%.  This means that an individual earning a $100,000 wage in 2013 will see an increase of $2,000 in payroll taxes alone.

7.      New Medicare Taxes

Two new Medicare taxes are set to begin in 2013, both as a part of the funding provisions of the relatively new healthcare bill, the Patient Protection and Affordable Care Act.

The first new tax is an additional 0.9% tax on individuals with earned income in excess of $200,000, in excess of $250,000 for couples.  This tax will apply to the total household earned income for couples, not the individual.  For example, if a household has both spouses working and each spouse earns $150,000 for a total household earned income of $300,000, the $50,000 above the threshold would be subject to the additional tax.  In this example, the new tax on the excess would be $450.

The second new tax is an additional 3.8% tax on the lesser of: 1) Net investment income (interest, dividends, annuities, rents, capital gains, passive investment income, etc.); or 2) The excess of Adjusted Gross Income over the applicable threshold – $250,000 for married couples, $200,000 for individuals.  Depending on your own total income level and your net income from investments, this could be a significant addition to your 2013 tax bill.

Summary

While the technicalities of each increase or new tax can be confusing and overwhelming, the message is clear: taxes are set to rise in various shapes and forms next year.   Of course, there is always the possibility that Congress will make changes before or even soon after entering 2013.   While we feel it is wise for you to understand how the changes would affect you and to explore appropriate planning strategies, consider waiting to implement anything major until closer to the end of the year when the tax picture for 2013 is (hopefully) clearer.


Disclaimer

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Longview Financial Advisors, Inc.), or any non-investment related content, made reference to directly or indirectly in this newsletter or post will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter or post serves as the receipt of, or as a substitute for, personalized investment advice from Longview Financial Advisors, Inc.. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Longview Financial Advisors, Inc. is neither a law firm nor a certified public accounting firm and no portion of the newsletter or post content should be construed as legal or accounting advice. A copy of the Longview Financial Advisors, Inc.’s current written disclosure statement discussing our advisory services and fees is available for review upon request.

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