NOT JUST FOR THE RICH
It’s time to start thinking about year-end tax planning, and several rules have a new look.
Most of the big federal changes affect higher-income individuals, with little impact on everyone else. But a few trickle down the income scale, affecting people who don’t view themselves as rich.
The main catalysts were the American Taxpayer Relief Act and the Affordable Care Act. Between them, several new tax traps could await the unwary. It may be smart to review your situation and possibly make some moves over the waning months of 2013.
The most obvious change for higher earners is the new top tax rate of 39.6 percent on ordinary income, supplementing the previous brackets featuring rates of 10, 15, 25, 28, 33 and 35 percent. For 2013, the top rate kicks in for singles with income at or above $400,000 or married couples making $450,000 and up, so this change affects few people.
Affluent individuals, in generally the same income ranges, also face a higher rate on long-term capital gains and qualified dividends of 20 percent, up from the previous ceiling of 15 percent, which still applies to middle-income individuals (people in the lower 10 and 15 percent income brackets can qualify for a 0 percent capital-gains rate). Although some new tax rules apply only to high-income individuals, others affect people who probably don’t view themselves as rich. Here are examples of income thresholds at which these rules start: Income where tax starts Singles Married couples Medicare surtax $200,000 $250,000 Net investment income $200,000 $250,000
Because short-term gains are taxed as ordinary income at higher rates, a strategy from prior years continues to make sense — hold stocks, bonds and other assets more than 12 months to lock in the lower capital-gain levies, suggests researcher CCH.
Then there’s the new Medicare surtax to help fund the Affordable Care Act, and this is where things get more interesting because it reaches much further down the income scale, affecting some people who may not view themselves as wealthy. This tax of 0.9 percent comes into play when income starts to exceed $200,000 for singles or $250,000 and up for married couples. Reduced itemized deductions $250,000 $300,000
Employers are obligated to withhold a higher tax, but only for people above the income thresholds. The tricky part comes if you have two or more jobs that put you in range of the tax. In that case, you might need to ask one or both employers to increase your withholding.
You also might need to increase estimated tax payments, and you should make sure you have the wherewithal to pay what could be a largerthan-expected tax bill next April, cautions Tim Steffen, director of financial planning for Baird’s private-wealth unit.
Probably the most confusing new rule is the tax on “net investment income.” It adds 3.8 percent to the capital-gains