Musings from the CEO (Fall 2013)

Mike_Hoffman_17Here’s a dire prediction. You will remember 2013 as the year your taxes really went up! There has been a perfect storm of tax law changes that take effect in 2013, combined with the expiration of a number of recession tax relief measures, and the general prognosis that earnings and investment income are finally moving up in 2013 and into 2014.

In 2011 and 2012, those of you with earned income noticed a reduction in your Social Security withholding from 6.2% to 4.2%. That reduction is gone for 2013. You will also notice a Medicare tax increase of .9% that kicks in on earned income for those married taxpayers with modified adjusted gross income in excess of $200,000 for single taxpayers and $250,000 for married filing joint. This was part of Obamacare.

Also related to Medicare is a new Obamacare tax on net investment income, which includes capital gains (even taxable gain on the sale of a personal residence) of an additional 3.8% for those individual taxpayers with modified adjusted gross income of over $200,000 and married taxpayers with modified adjusted gross income of over $250,000.

The personal exemption phase outs (PEP) were eliminated during the recession over the last several years, but come back for 2013. This means that the deduction you would normally get for personal exemptions is phased out again, starting for those with adjusted gross income of over $250,000 for individual taxpayers or $300,000 for married taxpayers filing jointly.

Similarly, the limitations on itemized deductions, which had been suspended over the last several years, come back with a vengeance in 2013. These so-called Pease limitations reduce your itemized deductions up to 80% starting with individual taxpayers with adjusted gross income exceeding $250,000 or married taxpayers with adjusted gross income of over $300,000.

The threshold or floor for deducting medical expenses has been increased by 33 1/3% for 2013. In 2012, qualified medical expenses in excess of 7½% of adjusted gross income were deductible as an itemized deduction, and that threshold/floor has been increased to 10% for 2013.

Tax rates in general have gone up as a result of legislation taking effect in 2013. The top individual income tax rate has increased from 35% to 39.6%. The dividends and capital gains tax rate has increased by 1/3 from 15% in 2012 to 20% in 2013.

The Social Security wage base increased from 2012 to 2013 up to $113,700. That is the amount of earned income which is subject to the Social Security tax of 6.2% for an employee or 12.4% on earnings considered as from self employment.

What does all this mean? Tax rates on earned income have increased from potentially 52.1% (46.1% federal income tax, social security, Medicare, and 6% Georgia) to 61.8% (55.8% federal income tax, social security, Medicare, Obamacare and 6% Georgia). That’s 18.6% increase, and that’s the best scenario. Dividends and capital gains tax has increased 41.9%, from 21% (15% federal, 6% Georgia) to 29.8% (20% federal, 3.8% Obamacare, 6% Georgia).

Primarily, it means get your year-end planning done soon to mitigate any surprises. The need and the benefit of accelerating deductions or deferring income could be the most significant you have ever witnessed. Caution is advised to determine if you are in an alternative minimum tax situation, as this will have a significant effect on some year-end tax maneuvers that you might employ.

Examine your withholding and estimated payments to determine that you have eliminated or minimized any under-payment penalty. Explore the use of a plethora of state tax credits that are available, particularly in Georgia, to pay your state taxes. This could result in saving anywhere from 10% to 40% of your state tax liability, combined with the elimination of any potential under payment penalties.

Most tax preparers have software available to run a mock-up of your 2013 tax returns. This could come in handy to guide you as to whether it is advisable for you to accelerate certain deductions, harvest some capital losses to offset capital gains, convert traditional IRA assets to Roth IRAs, or confirm that your judgment to do nothing is rational.

In addition to being a full service law firm, Hoffman & Associates maintains a stand-alone tax practice area dedicated to the preparation and filing of all types of tax returns. Please do not hesitate to contact me or any of us if we can arrange to assist you in achieving some significant income tax savings for 2013.

For more information regarding this or any other estate or tax planning concern, please visit the Hoffman & Associates website at www.hoffmanestatelaw.com, call us at 404-255-7400 or send us an email.

In accordance with IRS Circular 230, this article is not to be considered a “covered opinion” or other written tax advice and should not be relied upon for IRS audit, tax dispute, or any other purpose. The information contained herein is provided “as is” for general guidance on matters of interest only. Hoffman & Associates, Attorneys-at-Law, LLC is not herein engaged in rendering legal, accounting, tax, or other professional advice and services. Before making any decision or taking any action, you should consult a competent professional advisor.

The 2013 Medicare Surtax: What You Need to Know

The American Taxpayer Relief Act of 2012 and the Patient Protection and Affordable Care Act of 2010 have ushered in new income tax provisions which become effective in 2013.  One of the new provisions is the 3.8% Medicare surtax on an individual’s Net Investment Income.  This tax is one of the funding provisions for the new health care legislation, known as Obamacare.  The surtax will impact high income taxpayers who have a modified adjusted gross income in excess of specific thresholds.

FIRST OF ALL, WHO IS A “HIGH INCOME” INDIVIDUAL?  WILL I BE SUBJECT TO THIS TAX?

Individuals will be subject to the tax if they have any amount of net investment income and their modified adjusted gross income (“MAGI”) for the year is greater than the following threshold amounts:

  •   Married filing jointly                                              $250,000
  •   Married filing separately                                        $125,000
  •   Single or head of household                                   $200,000

HOW IS THE TAX CALCULATED?

The 3.8% tax is calculated on the lesser of (1) your net investment income or (2) your MAGI in excess of the threshold amount.  Some common types of investment income are: interest (excluding tax exempt interest), dividends, capital gains, rental income (if you are not a real estate professional) and passive income from partnership activities.

DOES THE TAX APPLY TO THE GAIN ON THE SALE OF MY PERSONAL RESIDENCE?  WHAT ABOUT A VACATION HOME OR INVESTMENT REAL ESTATE?

Net investment income only includes the net taxable gain from the sale of a personal residence, which is the gain in excess of $500,000 for married individuals and $250,000 for single individuals.    The entire net capital gain from the sale of a vacation home, investment property or rental real estate is included in investment income.

DOES THIS TAX APPLY TO TRUSTS?

The tax will apply to estates and trusts with undistributed net investment income and an adjusted gross income in the amount of $11,650 for 2013.

WHAT CAN I DO TO MINIMIZE THE IMPACT OF THE SURTAX?

The timing of transactions becomes a very important tax planning tool in avoiding or minimizing the impact of the 3.8% surtax.  This is especially true for sales transactions of stock, real estate and other investments.  The current year tax impact of net investment income and other gains and losses should be reviewed in order to minimize the tax.

Other potential opportunities to minimize the surtax impact are:

  • Consider converting traditional IRAs to Roth IRAs.  This would reduce the MAGI in future years when distributions are taken from the accounts.
  • Investing in tax exempt bonds instead of taxable bonds.  The interest from the tax exempt bonds is excludable.
  • Harvesting capital losses to offset capital losses to reduce net investment income and MAGI.
  • Managing retirement plan distribution to maintain MAGI under the threshold amounts.

IS THE 3.8% SURTAX ON NET INVESTMENT INCOME THE ONLY MEDICARE SURTAX?  WHAT ABOUT EARNED INCOME?

No, there is also a .9% Medicare surtax on the wages and self-employment income of high income taxpayers.  This tax applies to earned income in excess of $200,000 for single filers, $250,000 for married taxpayers filing joint returns and $125,000 for married taxpayers filing separately.

For more information regarding tax planning, tax compliance and controversy, estate planning, or business law,  please visit the Hoffman & Associates website at www.hoffmanestatelaw.com or call us at 404-255-7400 or send us an email.

In accordance with IRS Circular 230, this article is not to be considered a “covered opinion” or other written tax advice and should not be relied upon for IRS audit, tax dispute, or any other purpose. The information contained herein is provided “as is” for general guidance on matters of interest only. Hoffman & Associates, Attorneys-at-Law, LLC is not herein engaged in rendering legal, accounting, tax, or other professional advice and services. Before making any decision or taking any action, you should consult a competent professional advisor.