2013 was the year of "Let's Tax the Rich!"

21 January 2014 / Uncategorized / Comments Off on 2013 was the year of "Let's Tax the Rich!"

2013 Tax increases for the rich!

There are SEVEN large tax increases for wealthy taxpayers this year that you probably haven’t heard much about.  Now that we are starting to file 2013 returns, it’s time to make you aware of these sneaky tax increases.

1. The 39.6% bracket is back! - Beginning in tax year 2013 (generally for tax returns filed in 2014), a new tax rate of 39.6 percent has been added for individuals whose income exceeds $400,000 ($450,000 for married taxpayers filing a joint return). The other marginal rates — 10, 15, 25, 28, 33 and 35 percent — remain the same as in prior years.  Thus taxpayers in the highest bracket see the top marginal tax rate rise to 39.6% in 2013 from 35% in 2012.  OUCH!

2. The “Phase-out” of itemized deductions returns to the tax code in 2013 after a several-year absence!  It applies to individuals with incomes of $250,000 or more ($300,000 for married couples filing jointly. An example is helpful to show how this would work. Assume that a married couple filing a joint return has an adjusted gross income of $500,000 and itemized deductions for mortgage interest, property taxes and charitable contributions of $100,000.The deduction amount disallowed under the phase-out is an amount equal to 3 percent of the excess of the taxpayer’s adjusted gross income over $300,000 for taxpayers filing a joint return, to a maximum of 80 percent of a taxpayer’s total itemized deductions.The excess amount in this example is $200,000 ($500,000 adjusted gross income minus $300,000) and 3 percent of that amount is $6,000, so the taxpayers would lose $6,000 of their $100,000 of itemized deductions.

3. The “Phase-out” of personal exemptions returns to the tax code in 2013 after a several-year absence!  For 2013, the personal exemption amount for you, your spouse and every child you have is a deduction of $3,900, each.  Thus a family of five would get to deduct $19,500 in personal exemptions.  A NICE deduction.The deduction is a bit more complicated than the itemized deductions, but the deductions start being whittled away at the same thresholds as the itemized deductions phase-out ( Income of $250,000 or more ($300,000 for married couples filing jointly).

4. Think Long Term Capital Gains are 15%?  Of course you do…they always have been…until NOW.Under the American Taxpayer Relief Act of 2012, the top capital gain tax rate has been permanently increased to 20% (up from 15%) for single filers with incomes above $400,000 and married couples filing jointly with incomes exceeding $450,000.

5. Thought the marriage penalty was gone?  Think AGAIN! This is one of the sneakiest tax increases that occurred in 2013.  This is because it’s hidden away in the tax brackets, which most people are not very familiar with!What am I talking about?  Let me explain by showing you the first four tax brackets in 2013 as single versus married.

10% Bracket – Single from $0 to $8,925.  MFJ from $0 to $17,850
15% Bracket – Single from $8,925 to $36,250.  MFJ from $17,850 to $72,500

See how the 10% and 15% brackets for MFJ are EXACTLY double those of Single?  So for taxpayers in the bottom two brackets, there is no marriage penalty.  However…

25% Bracket – Single from $36,250 to $87,850.  MFJ from $72,500 to $146,400 (not $175,700)
28% Bracket – Single from $87,850 to $183,250.  MFJ from $146,400 to $223,050 (not $366,500)

Now, we see that MFJ brackets are NOT exactly double.  In fact, once you hit the 28% bracket, being married costs you a bundle.  How much?  Depends on how much income they each earn.  Here are two examples! Two individuals each making $87,850 would never enter the 28% bracket if they stayed single, but if they are married, they will pay an additional 3% on $29,300! Two individuals each making $183,250 would never enter the 33% bracket if they stayed single, but if they are married, they will pay an additional 5% on $143,450!

6. Form 8906 – The new 3.8 percent surtax on investment income that applies to single filers with modified adjusted income of more than $200,000 and married couples filing jointly with more than $250,000.In general, investment income includes, but is not limited to: interest, dividends, capital gains, rental and royalty income, non-qualified annuities, income from businesses involved in trading of financial instruments or commodities and businesses that are passive activities to the taxpayer.  To calculate your Net Investment Income, your investment income is reduced by certain expenses properly allocable to the income.

7. Form 8959 – The new .9 percent surtax on earned income that applies to single filers earning more than $200,000 and married couples filing jointly earning more than $250,000.An individual will owe Additional Medicare Tax on wages, Tips, compensation and self-employment income (and that of the individual’s spouse if married filing jointly) that exceed the thresholds above. Medicare wages and self-employment income are combined to determine if income exceeds the threshold. A self-employment loss is not considered for purposes of this tax.

As you can see...2013 was the year of "Tax the Rich!"  If you have any questions, please give Widget a call and we can help you!

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