Expert's Corner - The Tax Man Cometh in 2013
Dan Hughes is a Director at CBIZ MHM in Phoenix, Arizona. If you have questions please contact him at DHughes@CBIZ.com or 602-264-6835.
Now that the election is over, it’s time to consider how the upcoming changes in the tax law will effect you. There are many proposed changes on the way that haven’t been fully accepted or implemented so I’ll just focus on the known changes for 2013 and some things that can be done before year end to lessen the tax burden.
0.9% Medicare Tax Withholding Requirement
Taxpayers with wages above $200,000 ($250,000 for married couples filing jointly), or self-employment income above those levels, will be subject to an additional 0.9% Medicare tax beginning in 2013 on that excess income. For married taxpayers filing jointly, the additional Medicare tax will be based on their combined wages, complicating the withholding process for some employees.
The employer must begin withholding the additional Medicare tax in the pay period in which the employee’s wages exceeds $200,000, regardless of the employee’s filing status. As a result, the employee may be subject to the additional Medicare tax withholding even if the couple ultimately doesn’t owe the tax because their combined wages are less than $250,000. In this situation, the extra Medicare tax withholding would be reflected as a tax payment on the couple’s individual tax return and could be used to offset their income tax liability or be refunded.
Health Flexible Spending Account Limits
The amount that can be contributed to a health flexible spending account (FSA) is limited to $2,500, effective for plan years beginning on or after January 1, 2013. The limit does not apply to dependent care assistance, adoption care assistance or amounts applied towards the employee’s health insurance premiums. The $2,500 limit will be indexed for inflation beginning with 2014 plan years.
Increase in Floor for Medical Expense Itemized Deduction
Historically, qualified medical expenses were deductible as an itemized deduction on Schedule A of Form 1040 to the extent that the qualified expenses exceeded 7.5% of the taxpayer’s adjusted gross income (AGI). Beginning in 2013, the 7.5% floor will increase to 10% for most taxpayers. Beginning in 2013, that threshold would increase to $10,000. Expenses that are reimbursed by insurance or paid for with pre-tax dollars are not eligible for the deduction. Taxpayers who are age 65 or older by the end of the tax year are exempt from the increase in the AGI floor until 2017. For married couples, only one spouse needs to be age 65 by the end of the tax year for the couple to be exempt from the increase in the AGI floor, even if the couple files separate tax returns. Taxpayers subject to the alternative minimum tax (AMT) may not feel the effects of the increase in the AGI floor. The medial expense AGI floor for AMT purposes historically has been 10% and will continue as such, even for those taxpayers age 65 and older.
3.8% Medicare Tax on Net Investment Income
Historically, Medicare tax has only been assessed on earned income. Beginning in 2013, individuals with income over certain levels will be subject to a 3.8% Medicare tax on net investment income. While this new tax does not impact employers directly, many business owners and executives will be impacted.
For individuals, the Medicare tax is equal to 3.8% multiplied by the lesser of:
· Net investment income, or
· Modified adjusted gross income (AGI) in excess of $200,000 ($250,000 for married couples filing jointly).
Modified AGI is equal to AGI plus the foreign earned income exclusion, if applicable.
For purposes of the 3.8% Medicare tax, net investment income generally is the sum of the following items in excess of properly allocable deductions:
· Gross income from interest, dividends, annuities, royalties and rents;
· Other gross income from any passive trade or business or trade or business of trading in financial instruments or commodities, and;
· Net gains attributable to the disposition of property.
Investment income does not include:
· Investment income that is excludable from taxable income (e.g., municipal bond interest, excluded gain from sale of personal residence);
· Qualified retirement plan distributions; and
· Income from the active trade or business of a partnership or LLC, S Corporation or sole proprietorship in which the individual materially participates.
Some Planning Tips
· Consider taking capital gains before year end. Wash sale rules don’t apply to gains so you can reset to a higher basis
· Review your investment strategy to become more tax efficient. There are still some tax- advantaged investments such as municipal bonds, life insurance and annuities
· Think about gifting and taking ordinary income in 2012 as opposed to 2013.
· We still don’t know all the changes yet so you will have to stay tuned and be ready for future changes.
The views and opinions expressed are not those of Pathlight Investors and are intended to be for educational purposes only. Pathlight Investors cannot vouch for the accuracy of the information presented. Please contact the author of the article to determine how this information pertains to your specific situation.