2013 Tax Changes that Could Affect You - Part 2

2013 Tax Changes that Could Affect You - Part 2

[caption id="attachment_466" align="alignleft" width="150"]Frank J. Basile, CPA Frank J. Basile, CPA[/caption]

In Part 1, we will look at some of the effects of the 2013 the tax changes. In Part 2, we will explore the effects on wage earners, self-employed, gifts and estate tax and more.

Wage Earners and Self-Employed Individuals

Wage earners and self-employed individuals will be impacted by other tax increases as well. The 2% payroll tax cut is set to expire, which will reduce take-home pay for employees and increase self-employment tax for qualifying individuals. The Medicare rate for individuals with gross wages (or self-employed income) in excess of $200,000 will increase to 2.35% from 1.45%.

The Health Care and Education Reconciliation Act of 2010

The Health Care and Education Reconciliation Act of 2010 (generally referred to as the "health care act") contains a provision that will subject certain individuals to a new 3.8% "unearned income Medicare contribution" tax beginning in 2013. (This is in addition to, and different from, the Medicare tax assessed on all wage earners and self-employed individuals.) This new tax applies to net investment income or the excess of a taxpayer's modified adjusted gross income (MAGI) above certain thresholds ($200,000 for individuals and $250,000 for joint filers), whichever is less. For this purpose, net investment income includes interest, dividends, royalties, rents, capital gains, and passive income from trade or business activities. As a result, the effective tax rate on passive activities will actually be higher than if an individual was active in the business, but not subject to self-employment tax on the same income, because passive income will be subject to the additional 3.8% unearned income tax.

Gift, Estate, and Generation-Skipping Taxes

Without some action from Congress before year-end, tax rates are poised to increase for gift, estate and generation-skipping taxes on January 1, 2013. Specifically, without legislative action, we will see the following estate, gift and generation-skipping tax rate increase and exemption decreases:

  • a 57% increase in the highest estate, gift and generation-skipping tax rate (top rate once again 55%)
  • a more than 80% decrease in the estate and lifetime gift tax exemptions (total exemption $1 million)
  • a 73% decrease in the generation-skipping tax exemption (total $1.36 million, which will be indexed for inflation).

Thus, it will be prudent for taxpayers to take steps before the end of 2012 to lessen the impact of these tax changes, even though there is a slight chance that Congress will enact legislation to extend or nullify some of these provisions. With the Presidential election in November, it is unlikely that Congress will act before then, which leaves little time before year-end to make any sweeping changes to tax legislation and income tax forms.

In Part 3, we will discuss some strategies to minimize the effects of these changes.

We would love to talk to you to see how these changes will affect you and your family. Give us a call:

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