While for some people New Years means looking forward to a new beginning, for others it’s time to start estimating April’s tax bill. Year-end 2013 brought along new tax regulations as well as more challenges for individuals and businesses. This article explores some of the changes that may impact your taxes. These changes include the new additional Medicare Tax, Net Investment Income Surtax, reduced medical expense deductions and a phase out of personal exemptions.Some individuals may be astonished to find that they owe additional taxes in 2013 even though the Bush-era tax cuts were extended. Some of these new taxes may result from the 0.9% Additional Medicare Tax and the 3.8% Net Investment Income (NII) surtax. Since its enactment, the Medicare program has been funded through a 1.45% tax imposed on employee earnings through a payroll deduction (which is matched by the employer when they file payroll tax returns). However, beginning in 2013 an additional 0.9% Medicare tax will be imposed on the employee’s share of the Medicare tax. This additional 0.9% tax is imposed on married taxpayers with income over $250,000 and single taxpayers earning over $200,000. For example, a single tax payer earning $300,000 will pay additional Medicare taxes of $900. This $900 tax is computed on the $100,000 of income exceeding the $200,000 limit.
The new 3.8% Net Investment Income Surtax or NII Surtax applies to investment income exceeding certain amounts. The tax applies to interest, dividends, annuity income, rents and royalties, passive business income and most capital gains. For individuals, the tax is calculated as the lesser of their net investment income or the amount of investment income exceeding $200,000 for a single taxpayer or $250,000 for married couples filing jointly. For example, a single taxpayer with a salary of $100,000 and $50,000 if net investment income making a total of $150,000 of income will not have to pay the 3.8% surtax, because their income falls below the $200,000 threshold amount. However, if the taxpayer had net investment income of $100,000 and taxable income of $220,000, then a NII Surtax tax of $760 would be due (3.8% of $20,000).
Itemized deductions allow individuals to subtract certain expenses like home mortgage interest, charitable contributions and real estate taxes from their taxable income. Some of these expenses are deductible as itemized deductions only to the extent they exceed a specified percentage of your income. Beginning in 2013, taxpayers might see a slight increase on those percentages. For example, medical expenses went from a rate of 7.5% in 2012 to 10% in 2013. This means that medical expenses are only deductible in 2013 when they exceed 10% of taxable income. To make matters worse, some itemized deductions could be phased out altogether for higher income taxpayers. Beginning in 2013, as income goes above $250,000 for single taxpayers or $300,000 for married taxpayers itemized deductions will be reduced.
Individuals are permitted to claim a personal exemption for themselves, a spouse, and any dependants they support. Personal exemptions reduce your taxable income and, thus, result in lower taxes. In 2013, the personal exemption amount is $3,900 per person, but the deduction is reduced for higher income taxpayers beginning at $300,000 for married and $250,000 for single taxpayer. Once income exceeds $372,500 for single taxpayers and $422,500 for married taxpayers, the personal exemption is completely lost.
These are just a few of the many changes made to an already complex tax system. Having a strategic plan and being well informed can maximize savings and minimize your upcoming tax bill.
