Hi All, Here is your December 2013 Tax News Letter, which you might be a little uneasy with, Especially with the Affordable Care Act Penalties that will be added to your tax liability . Your 2013 Tax Bill May Give You A Shocker
Article Highlights
Regular and capital gains tax rates increase for higher income taxpayers New 3.8% net investment income tax Additional 0.9% health insurance payroll and self-employment tax Phase out of Exemption Deduction
Phase-out of itemized deductions
Many higher-income taxpayers are in for a shock when their 2013 income tax returns are prepared.In 2013, a significant number of tax increases, and new limitations on deductions, will impact higher income taxpayers. Before you decide that you are not a higher income taxpayer, keep in mind that your income does not just include your earnings from work—it also includes gains from the sale of property, investments, business assets, and other capital items. So if you havea significant gain from a sale, even though the gain can be attributed to many years of appreciation, it is all taxable in the year of sale, and could place you in the higher income category.
It is important that you are aware of these changes, plan for them in advance,are prepared for the higher taxes, avoid underpayment penalties, and when appropriate, do some tax planning in advance to mitigate the bite of these new taxes. This article highlights many of the tax changes that take effect in 2013.
Higher individual income tax rates for some. Generally, the regular income tax rates remain the same at 10%, 15%, 25%, 28%, 33%, and 35%. But to the extent a single individual’s income exceeds $400,000 it will be subject to a new, 39.6% tax rate. The 39.6% threshold for joint filers and surviving spouses will be $450,000, and $425,000for those filing as the head of household.
New Hospital Insurance tax. For higher income workers and self-employed individuals, an additional 0.9% hospital insurance (Medicare) tax is added to the FICA payroll tax (for employees), and self-employment tax (for self-employed individuals). This additional tax applies to wages and net self-employment income in excess of $250,000 for joint filers, $125,000 for married filing separately, and $200,000for all others. For employees, this tax is automatically withheld from their payroll checks.
Surtax on unearned income. Aspart of the Affordable Care Act, a new tax is imposed upon the net investment income of individuals, estates, and trusts. For single individuals, the tax is 3.8% of the lesser of: (1) net investment income; or (2) the excess of modified adjusted gross income over the threshold amount of $200,000. For joint filers and surviving spouses, the threshold is $250,000, and for married taxpayers filing separately, the threshold is $125,000. Net investment income is investment income less investment expenses. Investment income includes income from interest, dividends, non-qualified annuities, royalties, rents (other than derived from a trade or business), capital gains (other than derived from a trade or business), trade or business income that is a passive activity with respect to the taxpayer, and trade or business income with respect to trading financial instruments or commodities.
Increased Capital Gains.Generally the long-term capital gains and qualified dividends tax rates remainat 0% and 15%, except for the fact that a 20% rate has been added for single taxpayers with incomes exceeding $400,000. For joint filers, the threshold for the 20% rate is $450,000, and $225,000 for married individuals filing separately.
Personal exemption phase-out.The personal exemption allowance for the taxpayer, a spouse, and each claimed dependent for 2013 is $3,900. For example a married couple claiming their two children as dependents would be able to deduct $15,600 (4 x $3,900) in personal exemptions when determining their taxable income. However, beginning in 2013,the exemption allowance begins to phase out for single taxpayers when theiradjusted gross income exceeds the threshold amount of $250,000. The startingthreshold of joint filers and surviving spouses is $300,000, $275,000 for heads of household, and $150,000 for married taxpayers filing separately. The exemption allowances are reduced by 2% for each $2,500 (or a portion thereof),by which the taxpayer’s adjusted gross income exceeds the thresholds.
Itemized deductions limitations. As with the exemption phase-out explained above, the itemized deductions are also phased out for 2013. The phase-out thresholds are the same as those for exemptions, and the itemized deductions are reduced by 3% of the amount by which the taxpayer’s adjusted gross income exceeds the threshold amount, with the reduction not to exceed 80% of the otherwise allowable itemized deductions. The reduction does not apply to the following deductions: medical and dental expenses, investment interest expense, casualty losses, and gambling losses.
As you can see, for some taxpayers the impact can be quite significant. However, it may not be too late to improve your situation with some year-end planning, and the sooner the better. Options include taking advantage of unrealized losses, business expensing, tax credits,delaying certain deductions and tax prepayments, income deferral, and other techniques. Please call this office for assistance.
You and the New Medicare Tax
Article Highlights:
New additional 0.9% Medicare tax for higher-incometaxpayers.
Threshold for paying the tax is combined wages and net self-employment income of over $250,000 for married individuals and $200,000 for others.
Certain combinations of income and marital status could result in unexpected tax liabilities and penalties.
There is a new additional Medicare tax in effect for 2013 that may require year-end actions. The new tax, which is part of the Affordable Care Act, imposes an additional 0.9% Medicare (HI) tax on some higher-income taxpayers. The threshold for paying the tax is combined wages and net self-employment incomeof over $250,000 for married individuals and $200,000 for others. (Taxpayers who do not have wage or self-employment income - for example, retirees or those with only investment income - are not subject to this new tax, regardless ofthe amount of their income.)
Employers are required to begin withholding the additional tax from an employee’s wages when the employee’s wage income exceeds $200,000. There are situations in which this will generate an additional refund and situations in which the withholding will be insufficient, creating an unexpected year-end taxliability and possibly penalties.
Here are some situations that may need your attention:
A married couple, both working for wages, and neither has wages in excess of $200,000, but the combination of wages exceeds $250,000.They will be liable for the full additional 0.9% tax on their combined wages that exceed $250,000 because neither of their employers withheld any of the additional Medicare tax.
A single individual has two separate jobs, neither producing wages in excess of $200,000, but the combination of wages exceeds $200,000. The individual will be liable for the full additional 0.9% tax on his or her combined wages that exceed $200,000 because neither of the employers will have withheld any of the additional Medicare tax.
A single individual has both wages and self-employment income, and the combination exceeds the $200,000 threshold. The individual will need to pay the extra Medicare tax on the combination of the wages and net self-employment income in excess of $200,000.
These and similar situations can lead to unexpected tax liability and can cause an underpayment penalty to be assessed. Also, in determining whether taxpayers may need to make adjustments to avoid a penalty for underpayment of the estimated tax, individuals should also be mindful that the additional Medicare tax might be over-withheld. This could occur, for example, in asituation in which only one spouse of a married couple works and reaches the threshold for the employer to withhold, but the couple's income won't exceed the $250,000 threshold to actually cause the tax to be owed.
In all of these (and other) situations, a new form in the taxpayers’ 2013 returns will be used to reconcile the Medicare tax that was withheld, if any,and the actual additional Medicare tax liability.
If you think you might be subject to this new tax and have questions or need assistance projecting your 1040 results and potential for unexpected taxliabilities and penalties, please give this office a call
Underpayment Penalties Going to GetYou?
Article Highlights
Taxpayers can be hit with underpayment penalties if their withholding and estimated payments are too low.
Underpayment penalties can be avoided by prepaying a safe-harbor amount of 90% of the current tax liability or 100% of the prior year’s tax liability.
The safe harbor for taxpayers with an AGI greater than $150,000 in the prior year is 90% of the current tax liability or 110% ofthe prior year’s tax liability.
Prepayment adjustments can still be made to minimize the underpayment penalty.
Prepayments must generally be made evenly during the year to avoid the penalty.
Withholding is treated as paid evenly throughout the year and can be used as a tool to avoid underpayment penalties.
Our “pay-as-you-go” tax system requires that you make payments of your taxliability evenly throughout the year. If you don’t, it’s possible that you owe an underpayment penalty. Some taxpayers meet the “pay-as-you-go” requirements by making quarterly estimated payments. Typically this is how self-employed individuals and those with other non-tax-withheld sources of income satisfy their prepayment obligation. When your income is primarily from wages, however,you meet the requirements through wage withholding and likely rely on your employer’s payroll department to take out the right amount of tax, assuming that you have given them accurate Form W-4 data and that this information has not changed through marital changes, a second job, or your spouse working. Unfortunately, what payroll withholds may not be enough!
You may also be underpaid if you:
Have a gain from the sale of property, e.g., stocks, bonds,or real estate;
Have other income from which there is no withholding (for example, a pension, alimony, IRA, interest, or dividends);
Are subject to the new surtax on net investment income for higher-income taxpayers; and/or
Are married or self-employed and subject to the new additional Medicare (hospital insurance) taxes.
To avoid underpayment penalties, you generally must prepay more than 90% of your current year tax liability or 100% of your prior year tax liability. For taxpayers with incomes in excess of $150,000 in the prior year, pre-paying either 90% of the current year taxliability or 110% of the prior year tax liability will generally avoid underpayment penalties. In addition, the penalties are quarterly-based, so the withholding and estimated taxes need to be paid evenly throughout the year .Please note that state prepayment rules may be different from the federal rules explained in this article. Even though it is late in the year, withholding is treated as paid evenly throughout the year, so you may still have time to adjust your withholding to make up for underpayments in prior quarters. In addition, underpayments are based on when the income was received during the year, and late-year increased estimated tax payments can help offset underpayment penalties for income received later in the year.
Think you may have underpaid? Why not give this office a call to be on the safeside? If you have questions related to the underpayment penalty or need assistance in determining if there are any late-year moves you can make to avoid the penalty, please give this office a call.
Franklin Katz, RTRP, ATP, PA, PB
Frank's Tax & Business Service
315 E. King St.
Kings Mountain, NC28086
Local # 704-739-4039 Toll Free# 877-857-1040
E-Mail: [email protected])
Web: www.frankstaxbusiness.com
IRS Circular 230 Notice: Unless expressly stated otherwise in this transmission, any tax advice contained herein, forwarded with or attached to this message was not and is not intended to be used, nor may it be relied upon or used, by any taxpayer for the purpose of (1) the avoidance of any
tax-related penalties under the Internal Revenue Code or applicable state or local tax law provisions, or (2 promoting, marketing or recommending to
another party any tax transaction or tax-related matters that may be addressed herein.
Article Highlights
Regular and capital gains tax rates increase for higher income taxpayers New 3.8% net investment income tax Additional 0.9% health insurance payroll and self-employment tax Phase out of Exemption Deduction
Phase-out of itemized deductions
Many higher-income taxpayers are in for a shock when their 2013 income tax returns are prepared.In 2013, a significant number of tax increases, and new limitations on deductions, will impact higher income taxpayers. Before you decide that you are not a higher income taxpayer, keep in mind that your income does not just include your earnings from work—it also includes gains from the sale of property, investments, business assets, and other capital items. So if you havea significant gain from a sale, even though the gain can be attributed to many years of appreciation, it is all taxable in the year of sale, and could place you in the higher income category.
It is important that you are aware of these changes, plan for them in advance,are prepared for the higher taxes, avoid underpayment penalties, and when appropriate, do some tax planning in advance to mitigate the bite of these new taxes. This article highlights many of the tax changes that take effect in 2013.
Higher individual income tax rates for some. Generally, the regular income tax rates remain the same at 10%, 15%, 25%, 28%, 33%, and 35%. But to the extent a single individual’s income exceeds $400,000 it will be subject to a new, 39.6% tax rate. The 39.6% threshold for joint filers and surviving spouses will be $450,000, and $425,000for those filing as the head of household.
New Hospital Insurance tax. For higher income workers and self-employed individuals, an additional 0.9% hospital insurance (Medicare) tax is added to the FICA payroll tax (for employees), and self-employment tax (for self-employed individuals). This additional tax applies to wages and net self-employment income in excess of $250,000 for joint filers, $125,000 for married filing separately, and $200,000for all others. For employees, this tax is automatically withheld from their payroll checks.
Surtax on unearned income. Aspart of the Affordable Care Act, a new tax is imposed upon the net investment income of individuals, estates, and trusts. For single individuals, the tax is 3.8% of the lesser of: (1) net investment income; or (2) the excess of modified adjusted gross income over the threshold amount of $200,000. For joint filers and surviving spouses, the threshold is $250,000, and for married taxpayers filing separately, the threshold is $125,000. Net investment income is investment income less investment expenses. Investment income includes income from interest, dividends, non-qualified annuities, royalties, rents (other than derived from a trade or business), capital gains (other than derived from a trade or business), trade or business income that is a passive activity with respect to the taxpayer, and trade or business income with respect to trading financial instruments or commodities.
Increased Capital Gains.Generally the long-term capital gains and qualified dividends tax rates remainat 0% and 15%, except for the fact that a 20% rate has been added for single taxpayers with incomes exceeding $400,000. For joint filers, the threshold for the 20% rate is $450,000, and $225,000 for married individuals filing separately.
Personal exemption phase-out.The personal exemption allowance for the taxpayer, a spouse, and each claimed dependent for 2013 is $3,900. For example a married couple claiming their two children as dependents would be able to deduct $15,600 (4 x $3,900) in personal exemptions when determining their taxable income. However, beginning in 2013,the exemption allowance begins to phase out for single taxpayers when theiradjusted gross income exceeds the threshold amount of $250,000. The startingthreshold of joint filers and surviving spouses is $300,000, $275,000 for heads of household, and $150,000 for married taxpayers filing separately. The exemption allowances are reduced by 2% for each $2,500 (or a portion thereof),by which the taxpayer’s adjusted gross income exceeds the thresholds.
Itemized deductions limitations. As with the exemption phase-out explained above, the itemized deductions are also phased out for 2013. The phase-out thresholds are the same as those for exemptions, and the itemized deductions are reduced by 3% of the amount by which the taxpayer’s adjusted gross income exceeds the threshold amount, with the reduction not to exceed 80% of the otherwise allowable itemized deductions. The reduction does not apply to the following deductions: medical and dental expenses, investment interest expense, casualty losses, and gambling losses.
As you can see, for some taxpayers the impact can be quite significant. However, it may not be too late to improve your situation with some year-end planning, and the sooner the better. Options include taking advantage of unrealized losses, business expensing, tax credits,delaying certain deductions and tax prepayments, income deferral, and other techniques. Please call this office for assistance.
You and the New Medicare Tax
Article Highlights:
New additional 0.9% Medicare tax for higher-incometaxpayers.
Threshold for paying the tax is combined wages and net self-employment income of over $250,000 for married individuals and $200,000 for others.
Certain combinations of income and marital status could result in unexpected tax liabilities and penalties.
There is a new additional Medicare tax in effect for 2013 that may require year-end actions. The new tax, which is part of the Affordable Care Act, imposes an additional 0.9% Medicare (HI) tax on some higher-income taxpayers. The threshold for paying the tax is combined wages and net self-employment incomeof over $250,000 for married individuals and $200,000 for others. (Taxpayers who do not have wage or self-employment income - for example, retirees or those with only investment income - are not subject to this new tax, regardless ofthe amount of their income.)
Employers are required to begin withholding the additional tax from an employee’s wages when the employee’s wage income exceeds $200,000. There are situations in which this will generate an additional refund and situations in which the withholding will be insufficient, creating an unexpected year-end taxliability and possibly penalties.
Here are some situations that may need your attention:
A married couple, both working for wages, and neither has wages in excess of $200,000, but the combination of wages exceeds $250,000.They will be liable for the full additional 0.9% tax on their combined wages that exceed $250,000 because neither of their employers withheld any of the additional Medicare tax.
A single individual has two separate jobs, neither producing wages in excess of $200,000, but the combination of wages exceeds $200,000. The individual will be liable for the full additional 0.9% tax on his or her combined wages that exceed $200,000 because neither of the employers will have withheld any of the additional Medicare tax.
A single individual has both wages and self-employment income, and the combination exceeds the $200,000 threshold. The individual will need to pay the extra Medicare tax on the combination of the wages and net self-employment income in excess of $200,000.
These and similar situations can lead to unexpected tax liability and can cause an underpayment penalty to be assessed. Also, in determining whether taxpayers may need to make adjustments to avoid a penalty for underpayment of the estimated tax, individuals should also be mindful that the additional Medicare tax might be over-withheld. This could occur, for example, in asituation in which only one spouse of a married couple works and reaches the threshold for the employer to withhold, but the couple's income won't exceed the $250,000 threshold to actually cause the tax to be owed.
In all of these (and other) situations, a new form in the taxpayers’ 2013 returns will be used to reconcile the Medicare tax that was withheld, if any,and the actual additional Medicare tax liability.
If you think you might be subject to this new tax and have questions or need assistance projecting your 1040 results and potential for unexpected taxliabilities and penalties, please give this office a call
Underpayment Penalties Going to GetYou?
Article Highlights
Taxpayers can be hit with underpayment penalties if their withholding and estimated payments are too low.
Underpayment penalties can be avoided by prepaying a safe-harbor amount of 90% of the current tax liability or 100% of the prior year’s tax liability.
The safe harbor for taxpayers with an AGI greater than $150,000 in the prior year is 90% of the current tax liability or 110% ofthe prior year’s tax liability.
Prepayment adjustments can still be made to minimize the underpayment penalty.
Prepayments must generally be made evenly during the year to avoid the penalty.
Withholding is treated as paid evenly throughout the year and can be used as a tool to avoid underpayment penalties.
Our “pay-as-you-go” tax system requires that you make payments of your taxliability evenly throughout the year. If you don’t, it’s possible that you owe an underpayment penalty. Some taxpayers meet the “pay-as-you-go” requirements by making quarterly estimated payments. Typically this is how self-employed individuals and those with other non-tax-withheld sources of income satisfy their prepayment obligation. When your income is primarily from wages, however,you meet the requirements through wage withholding and likely rely on your employer’s payroll department to take out the right amount of tax, assuming that you have given them accurate Form W-4 data and that this information has not changed through marital changes, a second job, or your spouse working. Unfortunately, what payroll withholds may not be enough!
You may also be underpaid if you:
Have a gain from the sale of property, e.g., stocks, bonds,or real estate;
Have other income from which there is no withholding (for example, a pension, alimony, IRA, interest, or dividends);
Are subject to the new surtax on net investment income for higher-income taxpayers; and/or
Are married or self-employed and subject to the new additional Medicare (hospital insurance) taxes.
To avoid underpayment penalties, you generally must prepay more than 90% of your current year tax liability or 100% of your prior year tax liability. For taxpayers with incomes in excess of $150,000 in the prior year, pre-paying either 90% of the current year taxliability or 110% of the prior year tax liability will generally avoid underpayment penalties. In addition, the penalties are quarterly-based, so the withholding and estimated taxes need to be paid evenly throughout the year .Please note that state prepayment rules may be different from the federal rules explained in this article. Even though it is late in the year, withholding is treated as paid evenly throughout the year, so you may still have time to adjust your withholding to make up for underpayments in prior quarters. In addition, underpayments are based on when the income was received during the year, and late-year increased estimated tax payments can help offset underpayment penalties for income received later in the year.
Think you may have underpaid? Why not give this office a call to be on the safeside? If you have questions related to the underpayment penalty or need assistance in determining if there are any late-year moves you can make to avoid the penalty, please give this office a call.
Franklin Katz, RTRP, ATP, PA, PB
Frank's Tax & Business Service
315 E. King St.
Kings Mountain, NC28086
Local # 704-739-4039 Toll Free# 877-857-1040
E-Mail: [email protected])
Web: www.frankstaxbusiness.com
IRS Circular 230 Notice: Unless expressly stated otherwise in this transmission, any tax advice contained herein, forwarded with or attached to this message was not and is not intended to be used, nor may it be relied upon or used, by any taxpayer for the purpose of (1) the avoidance of any
tax-related penalties under the Internal Revenue Code or applicable state or local tax law provisions, or (2 promoting, marketing or recommending to
another party any tax transaction or tax-related matters that may be addressed herein.
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