Top earners may be surprised at all the additional taxes they’re paying when they file in April.
Christopher Axene, CPA, a principal in Tax Services at Rea & Associates, says many people could have exactly the same income as they had the previous year, but experience a 6 percent increase in their tax rate nonetheless.
“If they’re not doing tax planning or getting some idea where they stand, it might be a shock for some people,” he says.
Smart Business spoke to Axene about tax changes for 2013 that could sneak up on filers who haven’t accounted for the additional liability.
What are the key tax changes top earners can expect for 2013?
The increase in tax rates is the most significant change, going to a new top rate of 39.6 percent compared to the 35 percent rate in the past for couples with an annual income of more than $450,000.
There’s also a 3.8 percent surtax on net investment income. That applies to individuals with $200,000 or more in adjusted gross income (AGI) and couples with $250,000 or more.
Rates are increasing for capital gains and dividends, going from 15 to 20 percent. The AGI threshold for the 20 percent rate is $400,000 for individuals and $450,000 for couples.
Couples with W-2 income over $250,000 will also see an additional 0.9 percent Medicare tax this year.
Because of all of these changes, it’s important to start doing tax planning now.
Are there things that can be done to lessen the tax burden?
It’s not so much about getting away from these taxes; it’s a matter of being aware of their impact. It doesn’t make sense to take a pay cut just to pay less tax.
Most people will be withholding enough for the 39.6 percent tax rate, so that’s not likely to cause surprises. But the 3.8 percent surtax on investment income isn’t being withheld, and there’s no withholding tax associated with dividends. People might be making estimated payments, but payments based on prior year tax rates won’t be sufficient come April.
While there aren’t any major loopholes or tax havens, making the maximum contributions to a retirement plan continues to be a powerful tax deferral tool both for employees as well as the self-employed. Another thing to consider is the IRA distribution available to people who are over 70½ years old. As long as they are charitably inclined, they can take a distribution up to $100,000 from their IRAs and give that directly to a qualified charity. Those dollars won’t be included as taxable income, but they don’t get a tax deduction for the contribution either. For those who don’t need the money, it can be a useful tool to satisfy the yearly minimum distribution requirement and fulfill charitable goals.
Other than that, you could save on taxes by manipulating when income is earned or when deductions are paid. If you own a business and have control over your income, it might make sense to spread income over multiple years or bunch deductions into one year in order to maximize lower tax rates.
Should people who expect to owe more make additional tax payments now?
Run projections, get estimates and figure out what will be your tax liability. If you need to make up a difference, perhaps withhold more out of a bonus check in December or make an estimated payment in January to lessen the hit in April.
It’s more important this year than any recent year to run projections, particularly for high-income earners. About 90 percent of taxpayers probably don’t need to worry about this, but that top 10 percent could see tax rates going up 6 to 8 percent because of the new add-ons and new top tax rate. Income tax surprises usually aren’t a good thing. Start planning now for what will be coming in April 2014. ●
Christopher Axene, CPA, is a Principal in Tax Services at Rea & Associates Reach him at (614) 889-8725 or [email protected].
Insights Accounting is brought to you by Rea & Associates
