Beginning in 2013, there is a new additional Medicare tax for high-income individuals, trusts and estates, which will be faced with a new 3.8% surtax on net investment income. The surtax applies to net investment income but only to the extent that the taxpayers's modified adjusted gross income ("MAGI") exceeds $200,000 ($250,000 for married couples filing jointly and $125,000 for a married person filing separately). The threshold for Estates and Trusts is equal to the highest amount at which the maximum tax rate begins (projected to be $11,950 in 2013). Net investment income includes gross income from interest, dividends, annuities, royalties, rents and the taxable portion of gains from the sale of property.
For 2013 and 2014, all short-term capital gains will be at ordinary tax rates based on what brackets you are in. For long-term capital gains, the rate will be 0% for taxpayers in the 10% and 15% brackets; the rate will be 15% for taxpayers in the 25% to 35% tax brackets and the rate will be 20% for taxpayers in the 39.6% tax bracket. Ordinary income tax rates for those at the top of the income scale have climbed to 39.6%. And last January 2013, all taxpayers saw their Social Security payroll tax rate return to 6.2% after a two-year tax "holiday" during which the rate was 4.2%.
Probably the most straightforward way to reduce your taxable income this year is to take advantage of new contribution limits to tax-advantaged retirement plans. Deductibility limits on such accounts were raised by $500 this year, to $17,500 for employer-sponsored plans such as 401(k)s and to $5,500 for individual retirement accounts (IRAs). If you're 50 or older, you can kick in an extra $5,500 to your 401(k)—for a total of $23,000—and an additional $1,000 ($6,500 total) to your IRA. (Bear in mind that the deductibility of contributions to traditional IRAs may be limited or unavailable depending on your income and other circumstances.)
Lowering this year's income by deferring compensation until next year might also be worth looking into. It may seem that postponing income until the following year just means that you'll owe more next year. But if you're in a transitional year near your retirement, or if your income varies from year to year, this year's new, higher rates may make it worthwhile to investigate all the options.
For most people, the tax rate on long-term capital gains for investments you've held for more than a year and that you've sold at a profit—is holding steady at 15%. If you earn more than $400,000 ($450,000 for couples filing jointly), your long-term capital gains will be taxed at 20%. In addition, if your income exceeds $200,000 ($250,000 for couples filing jointly), you may be subject to a new 3.8% investment-income surcharge that's added to your regular capital gains tax rate to help fund Medicare.
If, for instance, you have losing investments, you could sell those and use the losses to offset certain capital gains you may have. You can also use your losses to offset as much as $3,000 in ordinary income—a particular benefit, because your tax rate on ordinary income is likely to be significantly higher than the rate you pay for long-term capital gains.
Recently, generous exemptions for gifts made during your lifetime or from your estate have now become permanent, and they've been enhanced by annual inflation adjustments. So for the current year, you can pass along $5.34 million tax-free ($10.68 million for couples) in lifetime and estate gifts. Exceeding the maximum estate tax exemption carries a higher cost, with excess gifts taxed as high as 40%. The separate annual exclusion from gift taxes is $14,000 per donee this year. But be aware that a holiday gift check written in 2014 that's not deposited until 2015 will count as a 2015 gift unless the gift check is made using a cashier's check or similar instrument that withdraws the money from the account in 2014.
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