2013 Tax Planning Guide

The good news is:  Tax planning for 2013 is much easier than last year. We went into 2013 before we had any clarity as to which Bush-era provisions would be extended.

The bad news is:  Higher-income taxpayers will face larger tax bills for 2013.

As we enter the 4th quarter, year-end is in sight—now is the time to take action and minimize your 2013 liability. It’s also a good time to check with-holdings and estimates in light of new rules for 2013:

Higher Rates

2013 brought a restored maximum rate of 39.6% for joint filers with taxable incomes over $450,000 (single, $400,000). For these individuals, capital gains rates also increased to 20%. On the capital gains side, one strategy is to review investment portfolios and balance gains with losses.

Phase Out of Personal Exemptions

For 2013, each personal exemption you can claim reduces your taxable income by as much as $3,900. However, a phase out for personal exemptions was reinstated for 2013. For taxpayers who are married and filing jointly, the phase out begins with adjusted gross income (AGI) of $300,000, and exemptions are fully phased out at $422,500 (single $250,000-$372,500).

Phase Out of Itemized Deductions

Itemized deductions will be affected if your AGI is over $250,000 (single) and $300,000 (married, filing jointly). Basically, deductions are reduced by 3% of the amount by which AGI exceeds the threshold. Certain deductions are not subject to reduction—medical expenses; casualty, theft and gambling losses; and investment interest.  State and local taxes are affected, and one strategy might be to delay or accelerate state estimated tax payments.

Medicare Contribution Taxes

The 2010 health care reform legislation enacted two new taxes. One is an additional .9% tax that applies to earned income over $200,000 (single) and $250,000 (married, filing jointly). In addition, a 3.8% surcharge applies to net investment income—the lesser of (1) this year’s investment income or (2) adjusted gross income in excess of $250,000 for joint filers (single, $200,000). Net investment income includes interest, dividends, rents, royalties, net capital gains, and passive trade or business activities. Tax-exempt municipal bond interest is not subject to the surtax.

While there is no certainty as to what future action Congress might take, we know what is new for 2013 (and maybe for 2014), and we can plan accordingly. That, also, is some good news.

For a more in-depth tax planning, look under the Resources tab above for our detailed 2013 tax planning guide.