Year-End Tax Update: The World as We Know It Is About to Change
• Income Tax Rates will increase from the current range of 10%-35% to 15%-39.6% in 2013.
• The current rate on Long Term Capital Gains will increase from 15% to 20%. One exception applies to assets that qualify as a 5-year capital gain, which will be taxed at 18%. A qualified 5-year capital asset is a long term capital asset held for more than 5 years and purchased after December 31, 2000.
• In 2013, there will no longer be a distinction in the tax rates between Ordinary Dividends and Qualified Dividends. Qualified dividends will be taxed at ordinary rates up to 39.6% rather than the current preferential long term capital gain treatment.
• The 2012 Payroll Tax holiday which reduced a portion of the payroll tax rate for employees and self-employed individuals by 2% expires on December 31, 2012. Consequently, the Social Security tax will increase from 4.2% to 6.2% on employees and 10.4% to 12.4% for self-employed individuals. In addition, the employee portion of the Medicare tax will increase from 1.45% to 2.35% for married taxpayers filing jointly on wages above $250,000 (and $200,000 for other taxpayers). The employer portion will remain at 1.45% on all wages. This additional tax should not be confused with the other 3.8% Medicare surcharge.
• The Estate Tax has been discussed often and will endure a significant change from 2012 to 2013. Unless Congress extends the current estate tax rules, the maximum rate will increase from 35% to 55%, and the exemption amount will decrease from $5 million to $1 million.
• One of the most contentious, yet misunderstood, tax changes for 2013 is the new 3.8% Medicare Contribution Tax on higher-income individuals, trusts, and estates. The Medicare surtax will apply to the lesser of a taxpayer’s net investment income (NII) or modified adjusted gross income that exceeds $250,000 for taxpayers married filing jointly (and $200,000 for other taxpayers). NII includes interest, dividends, annuities, royalties, rents, and gains from the distribution of property which have been derived from methods other than the active trade or business of the taxpayer; however, NII does not include any self-employment income subject to self-employment tax.
2013 Contribution Amounts to Note
• Gift Tax Exemption: $14,000
• Contribution Limit for 401(k)/403(b)/457 Plans: $17,500
• Catch-Up Contribution Limit (Age 50+) for 401(k)/403(b)/457 Plans: $5,500
• Income Limit for Full IRA Deduction: $59,000 single/$95,000 joint
• Income Limit for Full Roth IRA Contribution: $112,000 single/$178,000 joint
• Defined Benefit Plan Annual Benefit Limit: $205,000
• IRA Contribution Limit: $5,500
• Catch-Up Contribution Limit (Age 50+) for IRA Plans: Remains $1,000
These are just a few highlights of the expected tax changes for 2013. You should contact your personal tax adviser for additional information.
Michele Lipson, Partner, Marcum LLP, can be reached at Michele.Lipson@marcumllp.com or (305) 995-9720.