Massive Tax Changes in Store for 2013

On January 1, 2013 a number of favorable tax provisions are set to expire and some new taxes are set to begin. If Congress fails to act, the federal tax code will be a less hospitable climate for everyone. Here are the highlights.

3.8% Medicare Tax on Investment Income (A new tax under the Healthcare Act)

In 2013 you might be subject to an additional 3.8% tax on investment income.

Starting in 2013, these taxpayers will be at risk:o Taxpayers filing married-jointly, with adjusted gross income over $250,000; or

o Taxpayers filing single, with adjusted gross income over $200,000.

Taxpayers who meet these benchmarks will be subject to 3.8% surtax on investment income. This 3.8% tax is in addition to the tax already due on affected income. Income that will be subject to the 3.8% surtax includes interest, dividends, capital gains, rents and royalties and other unearned income (like passive income from a business in which a taxpayer is an owner including partnerships and S corporations).

.9% Medicare Tax on Earned Income (A new tax under the Healthcare Act)

In 2013, you might be subject to an additional .9% tax on earned income.

Starting in 2013, these taxpayers will be at risk:o Taxpayers filing married-jointly, with adjusted gross income over $250,000; or

o Taxpayers filing single, with adjusted gross income over $200,000.

Employees and employers have historically split the 2.9% Medicare payroll tax, with each paying 1.45% on all wages earned by the employee.

Starting in 2013, taxpayers with earned income above the threshold amounts will be subject to an additional .9% Medicare payroll tax on earned income. The additional .9% tax is imposed only on the employee, and only on income in excess of the $250,000/$200,000 threshold.

10% AGI Floor for Medical Expense Itemized Deduction (A provision under the Healthcare Act)

In 2013, your potential itemized medical expense deduction will decrease.

Currently, taxpayers can deduct medical expenses as an itemized deduction if the expenses were incurred during the year and exceeded 7.5% of AGI. The minimum level of deductible expenses will increase in 2013 to 10% of AGI. Taxpayers age 65 and older will continue to be eligible to use the 7.5% of AGI minimum, at least through 2016.

20% Maximum Capital Gains Tax Rate

In 2013, you might be subject to a 5% increase in capital gains tax rates.

Starting in 2013, the top long-term capital gains tax rate will go up to 20% from 15%. Generally speaking, married taxpayers earning more than $60,000 will be subject to the 20% capital gains tax rate.

Increases in Ordinary Income Tax Rates

In 2013, you will be subject to increased ordinary income tax rates.

Here is a comparison of the 2012 marginal income tax brackets and possible 2013 brackets for a married couple filing jointly. In 2013, the lowest marginal rate will increase from 10% to 15% while the highest marginal rate will increase from 35% to 39.6%.

2012 2013$0 to $17,500 10% $0 to $59,300 15%$17,501 to $71,000 15% $59,301 to $143,350 28%$71,001 to $143,350 25% $143,351 to

$218,45031%

$143,351 to $218,451

28% $218,451 to $390,050

36%

$218,451 to $390,050

33% $390,051 and above 39.6%

$390,051 and above 35%

No More Qualified Dividends

Dividends you receive in non-qualified securities accounts will be subject to ordinary income tax rates.

Under current law and for the last several years, a portion of many taxpayers’ ordinary dividends were given special tax treatment as “qualified dividends.” Qualified dividends have been taxed at lower capital gains rates instead of ordinary income tax rates.

Beginning in 2013, all stock dividends will be taxed at ordinary income tax rates. Some may also be subject to the 3.8% surtax discussed above.

Alternative Minimum Tax

In 2012, you might be subject to Alternative Minimum Tax (“AMT”).

Since the late 1960s, the AMT has been a part of the tax code. The stated purpose of the AMT was to assure that the wealthiest Americans paid a minimum amount of tax irrespective of certain deductions. However, the AMT thresholds have not kept up with inflation. Every year as more and more taxpayers have been subject to AMT, Congress has enacted “patches” or short-term fixes to reduce the coverage of the tax.

No AMT patch exists for tax year 2012 and if Congress fails to act, AMT is projected to hit 31 million taxpayers in 2012, up from only 4 million in 2011.

Payroll Tax Holiday

Your payroll taxes (or self-employment tax if self-employed) will go up by 2%.

For 2011 and again for 2012 (with much Congressional jockeying), the employee’s share of the Social Security portion of payroll tax decreased from 6.2% to 4.2%. Without further action by Congress, the rate will go back to 6.2% starting January 1, 2013.

Bonus Depreciation

Your business will not be able to accelerate depreciation in the first year of purchasing a capital asset.

For the last decade, favorable depreciation deduction rules have been enacted and extended which have allowed taxpayers to depreciate 30%, 50%, and (in some years) 100% of qualifying capital purchases in the year of purchase. Additionally, Section 179 of the tax code provided a more limited in scope, lump sum deduction for small businesses acquiring capital assets. Starting in 2013, all bonus depreciation provisions will expire leaving capital assets to be depreciated solely over their useful lives (from as little as 3 to as many as 39 years).

Estate and Gift Tax

Your estate will be far more exposed to more costly estate taxes with less room for planning strategies.

o Estate Tax: Paid by estate of decedent or for married couples, typically after death

of surviving spouse.

Year Amount of wealth excluded from estate tax

Top tax rate on estate value in excess of exclusion

2012 $5,120,000 if single; $10,240,000 if married

35%

2013 $1,000,000 if single; $2,000,,000 if married

55%

o Gift Tax: Paid during life by person giving gift subject to tax.

Year Amount you can give during life before paying gift tax

Top tax rate on gifts in excess of allowable

2012 $5,000,000 if single; $10,000,000 if married

35%

2013 $1,000,000 if single; $2,000,000 if married

55%

To discuss these tax changes and planning strategies, call Steve Filipowski at 312-803-7102.