Tax Changes for 2013 & 2014–Affordable Care Act

In my last blog post, I briefly introduced the new reality – that high income taxpayers will face additional taxes, starting in 2013. Indeed, “sticker shock” is the phrase I see most often about what awaits certain taxpayers when preparing their 2013 return.

Higher Income Earners

So, what’s new? Higher earners, moving forward, now will be subject to a set of new taxes, higher rates, and new limitations on deductions. Who is a “higher income” taxpayer? As you will see below, this is a bit of a moving target. And, what does this mean for your 2013 taxes?

Tax Rate Changes

First, rates have changed. Under the American Taxpayer Relief Act of 2012, higher tax rates apply to ordinary income, capital gains, and dividends. The income tax rates for most individuals stay the same as in 2012 (i.e., 10%, 15%, 25%, 28%, 33% and 35%). A new 39.6% rate applies, however, for 2013 for income above $450,000 for joint filers and surviving spouses; $425,000 for heads of household; $400,000 for single filers; and $225,000 for married taxpayers filing separately. Also, the top rate for capital gains and dividends rises to 20% for 2013 (up from 15% in 2012) for taxpayers with the same income levels noted above.


Second, limitations are imposed on the use of the personal exemption and itemized deductions. There is a personal exemption phase out for 2013 with a starting threshold of $300,000 for joint filers and surviving spouses; $275,000 for heads of household; $250,000 for single filers; and $150,000 for married taxpayers filing separately. Under the phase out, the total amount of exemptions that can be claimed by a taxpayer is reduced by a certain percentage for every set amount the adjusted gross income exceeds the relevant threshold. Also, itemized deductions are limited for higher earners, using the same dollar amounts as for the personal exemption phase out.

Affordable Care Act

That was the new world according to the Taxpayer Relief Act. Now, in the context of the Affordable Care Act, See IRS site on all tax aspects of Affordable Care Act, Click Here , you are a higher income earner if you earn in excess of $250,000 if you file joint returns; more than $125,000 for married taxpayers filing separate returns; and over $200,000 in all other cases. First, starting in 2013, there is a higher payroll tax for high-earning workers and self-employed taxpayers. An additional 0.9% hospital insurance tax will be applied as a component of the Federal Insurance Contributions Act (FICA) payroll tax imposed on wages in excess of the $250,000; $125,000; and $200,000 noted above. The additional 0.9% tax also applies to self-employment income in excess of the above figures.

Oh No, Surtaxes

There will also be a new surtax on the unearned income of higher-income individuals. An unearned income Medicare contribution tax is imposed on individuals, estates, and trusts. For an individual, the new surtax is 3.8% of the lesser of either net investment income; or the excess of modified adjusted gross income over the threshold amount ($250,000 for a joint return or surviving spouse, $125,000 for a married individual filing a separate return, and $200,000 for all others). For surtax purposes, gross income doesn’t include certain excluded items (e.g., interest on tax-exempt bonds).
Those are a lot of changes that are arriving for 2013. Hopefully, you and your tax professionals kept up during the year. If not, year-end tax planning activity may be especially busy. And, 2014 is likely to be busy as the IRS mails out its first examination letters for returns completed under the new rules.

If you have problems or issues with the IRS or other tax authorities, please contact Lowrance Law LLC at 703.506.1600.

Cari Lyn B. Pierce
(Licenses in North Carolina)

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