Looking Forward to April 15, 2014 (Richard Bell Commentary)

Monday, April 15, is the end of the 2012 tax season, and our accounting firm has been fielding a lot of questions about tax changes for 2013. Let’s look at some of the most recent changes.

Individual Income Tax Rates

Beginning in 2013, earned income — wages and salaries, earnings from self-employment, trade or business income, etc. — that exceeds $400,000 ($450,000 for married taxpayers filing a joint return) is subject to a new 39.6 percent tax rate. The other rates of 10, 15, 25, 28, 33 and 35 percent are unchanged. If your taxable income does not exceed $400,000, you will continue to pay a similar amount of income tax as in prior years.

Capital Gains & Dividends

Since the Bush era, the top tax rate on income derived from passive-investment type activities (publicly traded stock, bonds, derivatives, etc.) was maxed at 15 percent. For 2013 and beyond, however, the top tax rate on capital gains, dividends and interest income is now 20 percent. But this increase applies only if you fall within the highest income tax bracket ($400,000/$450,000 and up).

Affordable Heath Care Act

If your paycheck or self-employment income is above $200,000 ($250,000 for married couples), your Medicaid tax rate has gone up by 0.9 percent. Your employer is not required to take into account your spouse’s paycheck, but you may request additional federal withholding be taken out to cover the tax liability that will ultimately be reconciled on your 2013 personal tax return. Any over- or under-payments will be calculated on Form 1040 and show a balance due, or amount to be refunded, as necessary.

Secondly, if you have income over the $200,000/$250,000 threshold, you will be subject to an additional 3.8 percent tax on the lesser of passive investment income or modified adjusted gross income in excess of the threshold. Investment income includes net income from rentals reported on Schedule E, capital gains, as well as any other passive investments that are generating income for you.

So, depending on the amount and type of income you have, you could fall into the 39.6 percent bracket; have wages in excess of the threshold and owe the additional 0.9 percent Medicare surtax; have investment income that has additional tax of 3.8 percent; and even have your capital gains taxed at 20 percent. These increases, along with the reinstated phase-outs of itemized deduction and exemptions for taxpayers with income over $250,000 ($300,000 for married couples), can increase your tax rate by several percentage points. If you are in the higher tax bracket, you should start planning now to avoid surprises when you file your tax return next year.

Estate Taxes

Taxpayers who own closely held businesses may plan to pass those businesses off to family members without the burden or debt associated with the estate tax. During 2012, people with estates in excess of $5.12 million were making gifts in anticipation of an expected reduction of the exemption to $1 million for 2013. Instead, the basic exclusion amount has been raised to $5.25 million (to be adjusted for inflation). A new permanent estate exemption of $5 million (also inflation-adjusted) per taxpayer has removed the uncertainty of planning for an estate tax exemption, but the top rate for estate and gift taxes has been raised from 35 to 40 percent.

The concept of portability in estate taxation has been made permanent, and this is an estate-planning perk your attorney or tax expert can explain in detail. It is time to update your estate documents. The traditional way of forming trusts based on exemption limits is obsolete and the old “I love you will and trust” is back in style if you intend to leave your entire estate to your spouse.

The American Taxpayer Relief Act contains many more provisions that affect taxpayers, individual, corporate and estate tax planning: permanent alternative minimum tax exemption rates, bonus depreciation, increased Section 179 expensing limits, teacher expense deductions, charitable contributions from your IRA and more.

The permanence of tax laws will allow individuals to work on three- to five-year budgets and allow business owners to plan for cash flow requirements with a greater sense of certainty. The best advice is to consult with your attorney or accountant and plan early.

Richard Bell is an expert analyst on accounting strategies for small business, medical professionals and the trucking industry. He is founder and president of Bell & Co. of North Little Rock.