Reminder to Plan Ahead for Your 2013 Individual Taxes

With the fiscal cliff deal behind us, we now have a clear understanding of what to expect for the 2013 tax year. This overview will touch on the major changes that will have the biggest impact on your 2013 individual income tax return.

The good news is that even with all the changes taking place, taxpayers in the lower income brackets will see relatively little change. For these taxpayers, marginal income tax rates will not be increasing, most of the tax credits that individuals have become accustomed to are still in effect, and qualified dividends will still be taxed at preferential capital gains rates.

High-income earners will be those most affected by the recent tax law changes. There is a new 39.6% tax bracket that will apply to married couples with taxable income over $450,000 and singles over $400,000. The Pease Limitation was reinstated to reduce the most popular itemized deductions by up to 80% of their value. Personal exemptions, including exemptions for any dependents, will be phased out and at certain income levels will be completely eliminated.

Investment income was also targeted in this recent legislation as a way to raise taxes on high-income earners. For taxpayers in the new 39.6% tax bracket, tax rates on long-term capital gains and qualified dividends have been increased from 15% to 20%. This increase does not include the new 3.8% Obamacare surtax on net investment income which comes into effect during 2013 and is set to be levied on married taxpayers with modified adjusted gross income of $250,000 ($200,000 for single filers).

With all of these changes, taxpayers could see rates on long-term capital gains and dividends climb to 23.8% and rates on short-term capital gains and non-qualified dividends as high as 43.4%.

Please note that for purposes of the 3.8% surtax, investment income is broadly defined to include "passive" income from flow-through entities (i.e. partnerships, S corporations), including gains on properties sold out of these entities and gains on sales of ownership positions held in such entities.

In addition to the above-mentioned 3.8% surtax on investment income, the Obamacare legislation levies a separate 0.9% Medicare tax on earned income (i.e. W-2 wages, self-employment income) in excess of $250,000 for married taxpayers filing a joint return ($200,000 for single filers).

It is important to note that the Obamacare taxes will simply be part of your overall tax liability and will be subject to penalties and interest for underpayment. While individuals making safe-harbor estimates might avoid the penalties and interest, they will most likely owe taxes at the end of the year.

As rates continue to increase, individuals have a greater incentive to closely examine their investment and income considerations. Please contact your trusted tax advisors at Henderson Hutcherson & McCullough, PLLC today to discuss how these Regulations will impact your overall tax situation. We recommend that you have a projection prepared to help you plan for these potential increases in your 2013 liability.

HHM specializes in tax advisory services, and we would be happy to review your current situation, show how recent tax changes may affect you, and suggest tax-smart ways to achieve your short-and long-term financial goals.

Please contact Kevin Rose or any of your trusted tax advisors at Henderson Hutcherson & McCullough, PLLC today if you have questions regarding this information.