Many individuals may not be fully aware of the significant tax code changes that went into effect this year. This is probably because you have not had your 2013 taxes prepared yet, and you may be thinking it's business as usual.
Congress passed major changes to our income tax structure at the beginning of the year in the 2013 “American Taxpayer Relief Act.” It’s funny how their idea of “relief” is relieving you of your money.
I want to bring four changes to your attention before the year is over.
1. Our top tax bracket has increased significantly. Anyone making more than $400,000 individually or $450,000 as a married couple just had their base tax rate increase by 13 percent to 39.6 percent.
It is not too late to make pretax contributions to your company retirement plan in order to keep you in a lower bracket. The max contribution for 401(k)s and 403(b)s is up to $17,500, and, if you are older than 50, you can put away a total of $23,000 pretax. If you are self-employed, the limits on your SEP-IRA have also increased to $51,000 with a max of 25 percent of your compensation.
These measures may not only save you taxes this year but will also put a nice amount away for your future.
2. There is supposed to be a new long-term capital gains rate of 20 percent for earners in the top income bracket as described above. Unfortunately, it is really 23.8 percent due to the 3.8 percent Medicare surtax on net investment income. If an individual makes more than $200,000 or a married couple makes more than $250,000 of MAGI (modified adjusted gross income), then they are subject to the 3.8 percent surtax.
So, if you have a long-term capital gain and are making more than $400,000, you are also making more than $200,000 and will have both taxes to pay. This is an incredible 58.6 percent increase in long-term capital gains. Try to minimize the number of gains this year by not selling all your profitable investments. Unfortunately, many mutual funds hit you with long-term gains even if you don’t sell.
3. Medical expense deductions now must exceed 10 percent of AGI (adjusted gross income), up from 7.5 percent last year. If you have become accustomed to a nice deduction for your ever-increasing health care costs, it just got significantly reduced. You now have to have expenses exceed 10 percent before the deduction kicks in.
There is a small silver lining. Anyone older than 65 has until 2017 for the increase to take effect. If you are over 65 and have some procedures you’ve been putting off, don’t wait too long.
4. There is now an additional 0.9 percent Medicare tax on wages and self-employment income of more than $200,000 for an individual and $250,000 for a married couple filing jointly. There is not much you can do about this one. Even putting more away into retirement accounts won’t work, because this tax is on earned income, not MAGI. So you’re sort of stuck.
As I have said in the past, the best way to avoid these excessive taxes in the future is to invest in tax- efficient accounts today.
Roth IRAs, municipal bond income and proceeds from a life insurance contract are just some of the tools you can use to avoid these ever-increasing taxes in the future.
For those of you not in this mess yet, just wait. I have a feeling that our Treasury department has more increases in store for the rest of population in the near future. Be prepared!