2013 Tax Planning

Having spent six years working within the Financial Services tax group at Ernst & Young, two of our biggest tax deadlines annually were September 15th and October 15th. September 15th was the deadline for all corporate and partnership extended tax returns to be filed with the IRS while October 15th was the extension deadline for all individual tax returns. As we approach the September 15th deadline, it felt like a good time to revisit some of the tax changes implemented by the American Taxpayer Relief Act of 2012 and the Affordable Care Act (Obama Care) so you can plan accordingly over these last four months of 2013.

Although the American Taxpayer Relief Act didn’t provide relief for all, it did provide relief to anyone earning under $400,000 (single) and $450,000 (jointly) in that it extended the Bush tax cuts for marginal tax rates (set to expire at the end of 2012), keeping rates the same as they were in 2012. For those individuals earning $400,000 and families earning over $450,000– the marginal tax rate on ordinary income increased from 35% to 39.6% and the capital gains rate moved from 15% to 20%. Everyone earning a paycheck also saw their social security portion of FICA taxes rise from 4.2% to 6.2% which has already been realized when payment is received.

There were some advantages to the American Taxpayer Relief Act relating to gift and estate taxes which individuals can use in their estate planning discussions. Under the law, the $5 million exemption for estate and gift taxes was made permanent. Because this number is indexed to inflation, the 2013 exemption is actually $5.25 million. The estate tax rate for federal purposes did move up from 35% to 40%, but only after you exceed the $5.25 million exemption. The law also maintains the unified treatment of gift and estate taxes, meaning that if you were to gift $2 million over your lifetime, you would still have a $3.25 exemption for estate tax purposes upon your death in 2013. This provides individuals great opportunities to transfer wealth during their lifetimes. The law also kept intact the provision for portability of any unused portion of a deceased spouse’s estate tax exemption. This would allow a couple to transfer together up to $10.5 million tax free. Individuals and couples can still give annual gifts of $14,000 and $28,000 respectively that would not count against their $5.25 million lifetime exemption. A married couple could even give as much as $140,000 ($70,000 for a single individual) in a given year by “front-loading” a 529 plan for a family member. This is equal to five year’s worth of the annual exclusion gifted up front. By doing this you will not be able to make any gifts to this individual for the next four years without going over the annual exclusion limit. The advantage with front-loading the five years of annual exclusions is that it gives the money more time to compound and appreciate to pay for college expenses.

Not only did the Affordable Care Act change the way we plan and pay for health care expenses, it also created a new investment tax. This investment tax affects taxpayers with modified adjusted gross income over $200,000 (single) or $250,000 (joint filers). The 3.8% tax on Net Investment Income will be from interest, dividends, capital gains, rental and royalty income. The tax will only be on your net investment income (this does not include wages, 401(k) and IRA distributions), and only relates to the amount over $200,000 (single) or $250,000 (jointly) that you realize. Whether it’s your estate or retirement you are planning for, be aware of the thresholds and exemptions the IRS is granting as the rules have changed for 2013.