High Income Earners
If you are a high income household making more than $400,000 (single) or $450,000 (married filing joint), your tax bracket will increase from 35% to 39.6%.
Those in this bracket will also pay increased capital gains taxes – from 15% to 20%.
They will also pay a 3.8% surcharge on dividends, long term capital gains and other investment income. This surcharge is related to provisions of the Affordable Health Care Act.
Phase Out of Itemized Deductions and Personal Exemptions
There will now be phase outs of itemized deductions and personal exemptions for certain high income individuals. The thresholds are $300,000 married filing joint, $275,000 head of household, and $250,000 for a single taxpayer. For these taxpayers, it means they will not be able to claim all of their itemized deductions nor all of their personal exemptions.
Increased Payroll Taxes
All employees will now see a 2% reduction in their net pay as a 2 year payroll tax holiday for Social Security/FICA deductions has been allowed to expire. The tax will now be 6.2% (was 4.2%). To add to this burden, the wage ceiling upon which social security is taxed has been increased to $113,700 from $110,100 and this level will be adjusted annually for inflation.
Salary levels upon which Medicare tax is calculated remains unlimited, but if you earn more than $200,000 an additional 0.9% Medicare tax will be charged. So for high income earners, Medicare rates will equal 3.8%. Note that your employer does not pay a share of this additional 0.9% tax.
Alternative Minimum Taxes
Congress adjusted the Alternative Minimum Tax (AMT) methodology and permanently increased exemption amounts which amounts will be adjusted annually for inflation. This will keep taxes lower for millions of Americans.
Itemized Deductions and Credits
There were a number of deductions which for the time being have been left untouched:
- Educators $250 job expense deduction
- Mortgage insurance premiums remain deductible
- State and local sales taxes remain deductible
- The $1000 Child Tax Credit, Earned Income Credit and American Opportunity Tax Credit (for tuition costs) will all be extended through 2017.
- Qualified residence exclusion allowing certain Taxpayers to exclude debt forgiveness from taxable income.
- The 100% exclusion of certain gains from sale of qualifying small business stock has been extended from January 1 2012 to December 31, 2013. (Section 1202 exclusion).
Reduced Medical Expense Deduction
Please note that under the Affordable Care Act the threshold for deducting medical expenses jumps to 10% of adjusted gross income. For those over 65 it remains 7.5%.
The federal estate tax exemption remains at $5.12 million (the 2012 level indexed for inflation).The top tax estate and gift tax rate has been increased from 35% to 40%.
Home Office Deduction 2013
Starting in 2013, the IRS has announced a new simplified/reduced paperwork methodology to calculate and claim the Home Office deduction which provides for a $1500 deduction.
Other Notable 2013 Changes
- Social Security benefits will rise 1.7% - less than one-half of 2012's increase.
- The basic Medicare Part B premium will increase by $5 per month in 2013 to $104.90 per month. But Part B and Part D premiums will be significantly higher for those married with incomes over $170,000 and singles in excess of $85,000.
- Health Savings Account deductible pay-ins will be $6,450 for families and $3250 for singles.
- The maximum 401k contribution will be $17,500, a $500 increase over 2012.Those born before 1964, can contribute as much as $23,000.
- The pay in limits for IRA's and Roth IRA's will jump to $5,500, a $500 increase over2012.Those born in 1963 or earlier can put in an extra $1,000.
- The standard business mileage allowance will be 56.5c per mile – up a penny.
- The 50% bonus depreciation remains in effect for 2013 and $500,000 allowance for business asset write-offs continues.
- Special time restricted provisions allow for taxpayers 70 1/2 or older to make up to $100,000 in deductible donations to charities directly from IRA accounts.