Alright, I admit that the New Year’s salutation is rather robbed of its traditional cheer when prefaced by a reminder of the higher taxes in 2013, but a spoonful of irony helps the medicine go down.
And yes, I concede it’s a bit early for New Year’s greetings but the sooner we accept that the IRS is going to put a lump of coal in the nation’s stocking (a week late, no less), the sooner we can plan to minimize the damage of that gift.
I can’t pretend that this post (or any of my posts) offers any sort of definitive “How To” guide for minimizing the effect of tax increases in 2013.
For one, I’d be disqualified from all the exciting estate planning parties (ha!) if I divulged all the secrets of the trade. Moreover, everyone’s tax situation is unique so the existence of any mythical estate planning panacea is in fact just that–a myth.
Unfortunately, politicians in Washington don’t seem to be able to give us any guidance, either. So instead of telling you how to plan for increased taxes, today I’m just going to review some of the taxes that are increasing and the new taxes taking effect. Hopefully, the list is painfully long enough to serve as its own argument for why need to plan your estate in 2012.
Remember, the expiration of the Bush-Era tax cuts will mean higher taxes for everyone.
If the President and Congress do not act before the end of the year, the Bush-era income tax cuts will expire at the same time as the transfer tax increases (estate tax, gift tax, and generation-skipping transfer tax) and those tax laws will revert to what they were in 2001. If that happens:
- The 10% income tax bracket will be eliminated and the rates in the current 25% and higher income tax bracket will all increase.
- The marginal income tax rate for top earners will increase from 35% to 39.6% plus a Medicare surtax (discussed below).
- The long-term capital gains tax rate will increase from 15% to 20%.
- Dividends will be taxed as ordinary income instead of at 15%. For top earners, this means dividends will be taxed at 39.6% plus a Medicare surtax.
- Lower income bracket taxpayers (those now in the 10% and 15% brackets) will no longer be exempt from paying tax on capital gains and dividends.
- The estate tax exemption will go from $5.12 million to $1 million. Assets over the exempt amount, currently taxed at 35%, will be taxed at graduated rates starting at 35% and going up to 55%. This means more assets will be taxed at higher rates.
- The same thing will happen to the gift tax exemption.
- The generation-skipping transfer tax exemption will go from $5.12 million to $1 million, adjusted for inflation, and the rate will increase from 35% to 55%.
New Tax Rules for 2013
No matter the congressional negotiations, the following tax changes will take effect on January 1, 2013:
- A 0.9% Medicare surtax on a taxpayer’s wages over $200,000 if single, $250,000 for joint filers. Withholding begins when earnings exceed $200,000 regardless of marital status. This additional tax also applies to net earnings from self-employment. This additional tax is not imposed on the employer.
- A 3.8% Medicare surtax on net investment income for singles with MAGI (modified adjusted gross income) over $200,000 ($250,000 for joint filers) and on net investment income exceeding $11,950 for estates and trusts. This tax applies to the lower of total net investment income for the year or MAGI over the applicable threshold.
- Itemized medical expenses will be deductible only to the extent they exceed 10% of adjusted gross income. Those age 65 and older can continue to use the 7.5% adjusted gross income floor through 2016. The 10% floor continues to apply for alternative minimum tax purposes.
- Flexible Spending Account salary reduction contributions are capped at $2,500.
Estimated Cost-of-Living Adjustments (COLAs) for 2013
The follow tax changes will need to be accounted for in planning for your cost of living expenses in the coming year:
- Tax brackets would increase by about 2.5%. Note: There will be a 10% bracket only if Bush-era cuts are extended.
- Personal exemption would increase from $3,800 to $3,900. A phase-out of personal exemptions would again apply if Bush-era cuts are not extended. (There has been no phase-out since 2010.)
- Standard deductions are expected to increase for:
- Singles: $6,100 (up from $5,950)
- Heads of household: $8,950 (up from $8,700)
- Joint filers: $12,200 (up from $11,900)
- Dependents: $1,000 or earned income plus $350 (up from $950 or earned income plus $300)
- Additional amounts for age and/or blindness: $1,500 for unmarried (up from $1,450); $1,200 for married filers (up from $1,150)
- Long-term care insurance taken into account for the itemized medical deduction rises to $360 for those under age 40 and to $4,550 for those over age 70 (up from $350 and $4,370, respectively).
- Per diem exclusion for long-term care insurance proceeds will be $320 (up from $310)
- Itemized deduction phase-out will apply unless the Bush-era tax cuts are extended.
- Adoption credit will be $12,770 (up from $12,650) if Bush-era tax cuts are extended. If not extended, the credit falls to $5,000 ($6,000 for a special needs child).
- Exclusion of interest on U.S. savings bonds redeemed for higher education; MAGI threshold increased.
- Foreign earned income exclusion will be $97,600 (up from $95,100).
- IRAs and Roth IRAs contribution limit increased to $5,500 (up from $5,000 first set in 2009); those age 50 or older by year end can add another $1,000. MAGI limit on making Roth IRA contributions increased. MAGI limit on making deductible IRA contribution by active participants increased.
- Annual gift tax exclusion will be $14,000 per donee (up from $13,000); joint gifts by married couples up to $28,000 per donee.
- Lump-sum contribution to 529 plan will be up to $70,000 using the five-year gift tax rule (up from $65,000).
- U.S. person receiving foreign gifts must file a gift tax return for gifts exceeding $15,102.
Let me know if you have questions about the implications of any of these tax changes in 2013.
As always, good luck and good hunting.
The Fisher Law Office is renowned for its experience in estate planning, probate administration, asset protection, and business law. Annapolis attorney Randall D. Fisher has practiced for over 20 years, maintains the highest peer review rating for ethics (AV Preeminent) by Martindale-Hubbell, and is a sucker for long walks on the fairways.
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