The year-end for 2013 brings numerous new individual tax planning opportunities, thanks to the American Tax Payer Relied Act (ATRA) of 2013 and the Affordable Care Act (ACA). Additionally, there is the prospect of comprehensive tax reform in 2014 and even a delay to the 2014 filing season as the result of the IRS shutdown in October. This article will explore some of the best new opportunities that exist, along with traditional ones.
Capital Gains & Dividends
Beginning in 2013, the ATRA raised the top rate for dividends and capital gains from 15 percent up to 20 percent. These rates generally coincide with the new 39.6 percent top marginal income tax rate as well. This presents several opportunities.
Surtax on Net Investment Income (NII)
Beginning in 2013, higher income taxpayers may be subject to a 3.8 percent Medicare surtax. You only are subject to the surtax if your modified adjusted gross income exceeds a certain threshold. These thresholds are:
The amount subject to the surtax is the lesser of:
NII is more than simply capital gains and dividend income. It also includes income from a business where the taxpayer is a passive participant, and rental income earned by anyone except real estate professionals.
One-time spikes in income should be managed where possible to keep threshold income below the limits. This can be accomplished by managing Roth IRA conversions and the taxable sales of large assets.
Sunset Provisions
A number of temporary tax provisions are set to expire after 2013. While it is possible that Congress may extend these provisions again, there is no guarantee. Many believe it is unlikely given the budgetary issues faced and need for increased revenue. Here is a synopsis of some of the most significant items set to expire after 2013:
All of these provisions and a number of others will no longer apply beginning in 2014.
Traditional Planning Opportunities and Life Events
Much of our current tax code is written to encourage particular behaviors. As a result, the best planning opportunities often do not come from changes in tax law but from changes in your personal situation. Consider the following list of life events and make sure your accountant is aware of them to ensure you receive each and every deduction and credit available.
Conclusion
Planning can only be done if you act before year-end. If you have your own business, are a higher income taxpayer or experienced any significant life events, let us know so we can work together to optimize your personal tax picture before it is too late to plan.