Plan Now for New Tax Rates in 2013

As we approach mid-year 2013, don’t forget the three components of increased taxes on those with higher taxable income:

• First, part of the funding from the Affordable Care Act assesses new taxes on those with higher earnings. Depending on the amount and type of income you’ve received, the Medicare contribution tax of 0.9% on wages over $200,000 for singles and $250,000 for those filing jointly will be withheld from your paycheck. If you are self-employed, you earn the privilege of adding that amount to your self-employment (SE) tax.

Investment income doesn’t escape this new provision either. The net investment income tax of 3.8% is assessed on the interest, dividends, capital gains, net rents and other passive investments above the modified adjusted gross income amounts noted.These two provisions are interconnected, so a combination of earned and unearned income could press some of your income into one or both of these taxes.

• Second, the great New Year's tax compromise of 2013 left us with a new 39.6% bracket for taxable income in excess of $400,000 for singles and $450,000 for joint filers. So if you’ve been enjoying the 35% rates in recent years, consider the possibility of this new rate on your highest income.
• Third, at those same levels, your itemized deductions and personal exemptions will again see a phase-out similar to the rules we faced prior to 2010. Thus, beginning this year, the timing of large itemized deductions could be very important to how much tax you pay.

The bottom line? Check your federal income tax withholding and estimated tax installments again to be sure you don't face an underestimated tax penalty for 2013. Of course, the prior year base is generally still an option, but review that safe harbor amount carefully.  With these new higher taxes, an unexpected penalty could add insult to injury when we prepare your next tax return.  Also, remember to check for any potential alternative minimum tax that may sneak up on you.Yes, it’s a complicated mess we’re facing in the 2014 filing season.Contact Patrick & Robinson CPAs soon to request your important tax projection, and learn what you may be able to do to avoid some of these challenges. You can reach us at Office@CPAsite.com or 904-396-5400.