New Year’s Tax Considerations
Posted on: December 4th, 2013

The New Year is a time for celebrating with friends, making resolutions, and apparently paying more in taxes.  The Wall Street Journal has a recent article detailing the slew of new Federal tax hikes that took effect in 2013, as well as ways to minimize their impact in the coming tax preparation season.

The first, and simplest, was the end of the two-percentage-point cut in Social Security taxes that the Obama Administration had previously implemented as part of its stimulus package.  The end of this cut will cost some wage earners up to $2,274 this year.

The second new tax was the 3.8% tax on net investment income.  This tax applies to things such as net capital gains, dividends, interest, and rents and royalties, and phases in for married couples making more than $250,000 or individuals making more than $200,000.  One bit of good news with regard to this tax – it generally does not apply pension and retirement account payments (although income from these retirement accounts can still push your Adjusted Gross Income over the threshold thus making any amount of investment income subject to the tax).

Third, the Personal Exemption Phase-out or “PEP” returned this year meaning that the ordinary $3,900 personal deduction now phases out beginning at $300,000.  Taxpayers in that are not subject to the Alternative Minimum Tax (AMT) and are residents of states without a state income tax (such as Texas) should pay special attention to the PEP phaseout as it can add up to six percentage points to the tax rate paid on some income.

Finally, taxpayers will owe an extra 0.9% of Medicare tax on wages above $250,000 for couple or $200,000 for individuals.  This comes on top of the 2.9% Medicare tax for all workers, which is split evenly between employer and employee.

So what’s a taxpayer to do?  The article lists several tax-mitigation strategies when preparing your 2013 return.  First, minimize your adjusted gross income.  The most onerous tax increases this year apply to your income as it is calculated before deductions.  This means that tinkering with deductions won’t help avoid the increases.  Potential solutions include contributing to a tax-deductible IRA, 401(k), or defined benefit retirement plan; realizing capital losses up to the amount of realized gains; or tapping tax-free municipal-bond income.  You might also consider a charitable contribution of appreciated assets such as stock shares.  Finally, maximize medical and miscellaneous deductions as much as possible.

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