With my family snugly content amidst a long holiday season I felt compelled to pen some thoughts regarding the ubiquitous United States Tax Code and all its myriad of seemingly scary changes looming around the proverbial corner. This post lists ten tax matters to be aware of in the new year that have come up in conversations with clients. It also offers four recommendations to minimize tax obligations that I’ve found myself repeatedly trumpeting whenever asked. And finishes with some quick reference tax facts.
1. For 2013 the self-employment tax has reverted back to its normal 15.3% rate, and the limit for the Social Security portion of the tax has increased to $113,700.
2. The Section 179 deduction changes in 2014. For 2013 you are permitted to deduct up to $500,000, but for 2014 the limit falls to $25,000.
3. Special bonus depreciation expires at the end of 2013. This means that you can expense half the cost of new assets and depreciate the rest over time.
4. Arising out of the Affordable Care Act is a 3.8% Medicare surtax on single filers with adjusted gross incomes of at least $200,000 and married couples with combined adjusted gross incomes of at least $250,000. The tax is levied against the lesser of either their net investment income or the amount by which that income exceeds the threshold. High-wage earners also face an additional 0.9% Medicare payroll tax on top of the existing 1.45% tax paid by everyone.
5. Unmarried filers with taxable income above $400,000 and married filers with taxable income above $450,000 face a top 39.6% marginal tax rate compared to the previous 35%.
6. The tax rate paid by high-income investors on dividend income and long-term capital gains has risen from the previous 15% top rate to a 20% top rate.
7. Itemized deductions have been reduced for unmarried taxpayers with adjusted gross income greater than $250,000 and married couples with adjusted gross income greater than $300,000. Known as the Pease limitation, it reduces the value of itemized deductions by 3% of your adjusted gross income above the threshold.
8. High income taxpayers are also losing their personal exemptions, which ordinarily amount to $3,900 per person. For every $2,500 of adjusted gross income above the $250,000/$300,000 threshold, the personal exemption gets reduced by 2%.
9. The hardest hit by the tax hikes and exemption reductions are unmarried individuals with incomes above $400,000 and married couples with incomes above $450,000.
10. For high-income taxpayers, dividends and capital gains tend to make up a larger portion of taxable income. In 2012, capital gains and qualified dividend income were taxed at a top rate of 15%. Now, that same income gets taxed at a rate of 23.8%, which includes the Medicare surcharge.
The most important advice I am generally offering to most people crossing my path is to:
1. Avoid income spikes. Spread income out over several years to avoid exceeding the various income thresholds. The biggest mistake most anyone can make now is entering into a transaction that spikes your income. Something as simple as selling your house or converting to a ROTH IRA could push you above the various income thresholds subsequently potentially subjecting you to the Medicare surcharge or the new top marginal tax bracket.
2. Give generously both financially and in kind. For upper-income taxpayers in particular now is the time for charitable contributions as the benefits are magnified, particularly for gifts of appreciated stocks and securities. If you give away appreciated securities that you’ve held for more than a year, you get to take a deduction for the full fair market value on the day the gift is made, and avoid getting taxed at a higher rate on the inherent capital gains.
3. Municipal bond income is attractive because it isn’t subject to either income tax or the Medicare surcharge, but it is subject to Alternative Minimum Tax so beware. Growth stocks are still attractive because the income typically earned would be capital gains, which can be taken at your discretion.
4. Because the stock market has had such a good a year, mutual funds will make large capital-gain distributions. You can’t do much about that which makes it even more important to realize capital losses with under performing investments in a way that avoids the wash sale rule.
Quick Reference Tax Facts
Exemption and itemized deduction phase outs begin for MFJ at $305,050, HH at $279,650, S/HH at $254,200, and MFS at $152,525.
Kiddie Tax Standard Deduction is $1,000, the next $1,000 is taxed at child’s rate, and the excess is taxed at parent’s rate.
Adoption Credit – $13,190 is the maximum for the credit or assistance amounts. The phase out starts at $197,880 and is completely phased out at $237,880.
Child Tax Credit – refundable portion uses an income base of $3,000.
Education Credits. The phaseout for the American Opportunity Credit starts at $80,000 ($160,000 for MFJ). The phaseout for the Lifetime Learning Credit $54,000 ($108,000 for MFJ).
Transportation Fringe maximum exclusion for monthly parking is $250/month and for commuter highway vehicle and transit passes is $130.
Savings Bonds for Education phase out level starts at $113,950 for MFJ and $76,000 for other filing statuses. This is completely phased out at $143,950 for MFJ and $91,000 for other filing statuses.
§179 election changes to $25,000.
Foreign Earned Income exclusion is $99,200.
Long-term care premiums are limited to:
Age 40 or less——-$370
>40, but not >50——$700
>50, but not >60——$1,400
>60, but not >70——$3,720
Long-term care contract benefit amount is $330 per day.
IRA Contribution Limits – The maximum contribution to an IRA is $5,500, plus the $1,000 catchup. – IRA Phase out ranges – MFJ phase out for IRA contributions starts at $96,000. MFJ phase out for spouse contributions when spouse is not covered starts at $181,000. Single and Head of Household = $60,000. MFS starts at $0.
Roth IRA AGI phase out limits increase to beginning levels of $181,000 for MFJ, $0 for MFS, and $114,000 for other taxpayers.
Retirement Savers Credit – The indexed ceilings are: MFJ – $60,000, HH – $45,000, Others – $30,000.
Student loan interest maximum is $2,500, with a phase out starting at $65,000 ($130,000 for MFJ). This is completely phased out at $80,000 ($160,000 for MFJ)
Annual gift tax exclusion is $14,000, while the limit on gifts to noncitizen spouses is at $145,000.
Attorney Fee Awards are limited to $190 per hour.
MSA Self-only coverage annual deductible is not less than $2,200 nor more than $3,250, with out-of-pocket limits not in excess of $4,350. Family coverage annual deductible is not less than $4,350 nor more than $6,550, with out-of-pocket limits not in excess of $8,000.
Cafeteria Plan – The dollar limitation for §125 health FSAs remains at $2,500.
Nanny Tax – The wage threshold for the Nanny tax for 2014 is $1,900.
Small Business Health Insurance Credit – The dollar amount for purposes of limiting this credit is $25,400.
Exclusion amount for Estate/Gift tax is $5,340,000
10% bracket tops at $9,075
15% tops at $36,900 25% tops at $89,350
28% tops at $186,350
33% tops at $405,100
35% tops at $406,750
39.6% applies to anything over $406,750
10% bracket tops at $18,150
15% tops at $73,800
25% tops at $148,850
28% tops at $226,850
33% tops at $405,100
35% tops at $457,600
39.6% applies to anything over $457,600
Head of Household
10% bracket tops at $12,950
15% tops at $49,400
25% tops at $127,550
28% tops at $206,600
33% tops at $405,100
35% tops at $432,200
39.6% applies to anything over $432,200
10% bracket tops at $9,075
15% tops at $36,900
25% tops at $74,425
28% tops at $113,425
33% tops at $202,550
35% tops at $228,800
39.6% applies to anything over $228,800
Estates & Trusts
15% bracket tops at $2,500
25% tops at $5,800
28% at $8,900
33% at $12,150
39.6% applies to anything over $12,150 –
Exemption amount is $3,950. –
Standard deduction amounts are:
Single & MFS-$6,200,
Additional amounts for aged/blind-
$1,550 for unmarried and $1,200 for married status.