Are You Planning for the Anticipated 2013 Tax Changes?
by Avani Bharucha
Unless legislative action occurs before December 31, 2012, the end of this year will also mark an end to what has been a historically low tax environment. At December 31, 2012, the so called "Bush-era tax cuts" are set to expire and marginal tax rates are poised to increase, which will impact all taxpayers. In addition to the tax cuts which are expiring, there are new provisions such as an increase in Medicare tax rates and a new Medicare surtax which will impact high-income taxpayers. Furthermore, at the beginning of 2013, the estate and gift tax rate exemption will revert back to its 2009 level. The following is a summary of the major anticipated tax changes for 2013, along with some initial tax planning ideas to consider.
NEW TAX PROVISIONS
Surtax on Unearned Income: Beginning in 2013, a new Hospital Insurance (Medicare) surtax will be imposed on the unearned income of certain high-income taxpayers. This tax is 3.8% of the lesser of 1) net investment income or 2) the excess of modified adjusted gross income over the threshold; the threshold amount for 2013 is $200,000 for single filers and $250,000 for joint filers.
Medicare Tax Increase: The Medicare tax is currently being withheld at the rate of 1.45% from all employees. However, beginning in 2013, an additional 0.9% will be added to the income in excess of the threshold; the threshold amount for 2013 is $200,000 for single filers and $250,000 for joint filers. As a result, the tax rate will be 1.45% for wages up to the threshold amount and 2.35% for wages above the threshold amount. For self-employed taxpayers, the tax rate will be 2.9% for income up to the threshold amount and 3.8% for income above the threshold amount.
EXPIRING TAX PROVISIONS
Marginal Income Tax Rate Increase: In general, taxpayers have been enjoying reduced marginal tax rates since 2001. However, without any action from Congress before the end of 2012, tax rates will revert back to the higher levels that were in effect prior to 2001. The impact of this increase in rates will vary among taxpayers depending on their regular tax bracket, and the rates will apply to all types of ordinary income, including interest, dividends, short-term capital gains, employment income, etc.
|Year||Regular Marginal Tax Brackets (%)|
|Current Tax Rates||10.0||15.0||25.0||28.0||33.0||35.0|
|Anticipated Tax Rates for 2013||15.0||15.0||28.0||31.0||36.0||39.6|
Long-term Capital Gains Tax Rate Increase: After December 31, 2012, the reduced tax rates for long-term capital gains that have been effective since 2003 will revert back to the tax rates in use prior to that, impacting taxpayers in all brackets:
|Taxpayer's Regular Tax Bracket||Long Term Capital Gain Tax Rates|
|Current||Anticipated for 2013|
|If held under 5 Years||If held over 5 Years|
|15% and below||0%||10%||8%|
Qualified Dividend Tax Rate Increase: Currently, qualified dividends are taxed at a rate equivalent to the long-term capital gains tax rate. Beginning in 2013, dividends are anticipated to be taxed at ordinary income tax rates. The total tax rate on dividends could reach as high as 43.4% for taxpayers in the highest regular tax bracket, if they are also subject to the new Medicare surtax on unearned income as discussed above.
Social Security & Self-employment Tax Increase: The employee Social Security tax and self-employment tax rates have been reduced by 2% for the past two years, and currently stand at a rate of 4.2%. If this provision is not extended, beginning in 2013 the Social Security withholding tax rate will revert back to 6.2% and the self-employment tax rate will revert back to 12.4%.
Estate and Gift Tax: Currently, the maximum estate and gift tax rate is 35% with a $5 million exemption. In 2013, the maximum federal estate and gift tax rates will increase to 55% and the exemption amounts will decrease to $1 million.
PLANNING IDEAS TO CONSIDER
The impact of these upcoming changes can be significant, especially for taxpayers in high-income tax brackets. The following are some initial questions you may wish to consider in developing a strategy to plan for these tax changes prior to December 31, 2012:
- Should you accelerate any income or deductions into the 2012 tax year?
- Should you convert a traditional IRA to a Roth IRA during 2012?
- Should you complete the sale of appreciated stock or real estate in 2012 to take advantage of low long-term capital gain tax rates?
- Should you maximize retirement plan contributions in 2012?
- Have you reviewed your estate planning strategies and documents?
At this point, it seems unlikely that Congress will reach a final decision on the fate of these planned tax changes before the November 2012 election. In the face of such uncertainty, it will benefit taxpayers to proactively plan a strategy for these upcoming changes with the help of a tax professional. If you would like to review some of these initial tax planning questions in greater detail or discuss how the anticipated 2013 tax changes may impact your individual tax situation, please do not hesitate to contact Baratz & Associates, P.A.