With the end of 2013 right around the corner, now is the time to undertake a bit of tax planning to ensure your liability will be covered come April 15.
Major life events like buying or selling a home or getting married or divorced will bring major tax implications, but there is one major unknown that could bring significant changes: Congress.
There is little one can do about what Congress will decide to change in the final hours of the tax year. We are often surprised (and sometimes not) by what goes down at the last minute and this does not make for good tax planning.
While it’s impossible to know for sure what might be coming down the pipeline from Capitol Hill, some tax experts have sniffed the air and are preparing for some changes.
David Hryck, a renowned tax lawyer to stars and billionaire businessmen with the law firm ReedSmith, says filers can expect changes on deductions and capital gains.
Hryck, who has more than 16 years of experience representing high net worth individuals, is preparing for the following changes to go into effect for 2013 that should be factored in your tax plans:
- There is a new tax on certain investment income: The 3.8% Medicare surtax for individuals and trusts
- Itemized deductions are subject to special limitations again in 2013. We enjoyed a reprieve from this limitation in 2012, however, if income is above a certain level in 2013, certain wealthier taxpayers may not enjoy full deductibility. Prior to 2012, limitations applied if adjusted gross income (AGI) was higher than $159,950 or over $79,975 if married filing separately. If your income is above these levels, the total amount of itemized deductions will be reduced by 3% of the amount by which AGI exceeds the same threshold amounts.
- Long-term capital gains and qualified dividends will be subject to a new maximum rate of 20%. This is up from 15% in prior years and applies only if you are in the new 39.6% tax rate.
“Dividends were taxed as capital gains at 15% but the legislation was expiring which would have treated dividends as ordinary income (taxed at 39.6% in the highest bracket); instead, the legislation continues to treat dividends as capital gains and tax them at 20% (plus Obama care of 3.8%). I think this overall was a good deal for taxpayers as there is still meaningful tax planning that can be done particularly where taxpayers have businesses abroad and can repatriate the cash from overseas operations at capital gains rates,” says Hryck.
He also suggests keeping an eye on:
- The Bush-era tax rates are now permanent (as permanent as Congress decides they will be) with the addition of 39.6% tax rate on incomes in excess of $400,000.
- Marriage penalty relief is expected to be extended. If you are married filing joint, the income threshold for the 15% rate bracket is permanently set at twice the size of the 15% bracket for single filers. And the standard deduction for marrieds filing jointly is permanently set at twice the amount for single filers.
He also suggests married same sex couples should also consider the benefits of filing an amended
tax return for prior tax years to the extent possible (generally three years) and of course for future years. “Now that the federal government recognizes same sex marriages, same sex married couples can take advantage of the tax benefits allowable to married couples on a retroactive basis.”
- The PEP (personal exemption phase out) has been restored. This means the wealthy will not enjoy a full exemption deduction. It had been reduced and then suspended by the Bush-era cuts. However, the restored limits apply at higher income levels than under prior law. For 2013, personal exemptions will be reduced by 2% for each $2,500 (or portion thereof) of AGI above $300,000 for joint filers and surviving spouses, $275,000 for heads of households, $250,000 for singles, and $150,000 for marrieds filing separately.
Many other tax law changes that went into effect during 2012 are established as permanent according to legislation passed at the end of 2013. However, tax law changes every 20 minutes or so leaving us wondering at the definition of “permanent.”
Bonnie Lee is an Enrolled Agent admitted to practice and representing taxpayers in all 50 states at all levels within the Internal Revenue Service. She is the owner of Taxpertise in Sonoma, Calif., and the author of Entrepreneur Press book, “Taxpertise, The Complete Book of Dirty Little Secrets and Hidden Deductions for Small Business that the IRS Doesn't Want You to Know.” Her new e-book Taxpertise for the Creative Mind Murder, Mayem, Romance, Comedy and Tax Tips for Artists of all Kinds is available at all major booksellers. Follow Bonnie Lee on Twitter at BLTaxpertise and at Facebook.