For some tax filers, their tax bill this year will be greater than in the past. Specifically, certain taxpayers in the 35% tax bracket last year may see that figure increase to 39.6%. In addition, if you have sold a business or had large capital gains this year, your tax bill will likely be higher for your 2013 tax return. How will you be impacted and what can you do to still save on taxes?
Taxes rise for high income earners in 2014
Filers with taxable income over $400,000 ($450,000 for joint filers) will face a 39.6% tax rate for the 2013 tax year. If you happen to be in this ordinary income tax bracket, dividends and long-term capital gains are subject to a 20% tax rate as opposed to 15% for lower income filers. In addition, if you earn $250,000 ($300,000 for joint filers) there will be a 3% reduction to the itemized deductions you normally claim and phase-outs for personal exemptions.
The new health-care investment income surtax
Some taxpayers may also face the 3.8% investment flat tax if their adjusted gross income exceeds $200,000 ($250,000 for joint filers). For instance, an investor with $200,000 in wages and $25,000 in investment income either through capital gains (including home sales in excess of the capital gains exclusion), interest, rent, royalties or dividends, will be subject to a 3.8% tax on the $25,000, if they are a single filer.
The increased Medicare tax
The 1.45% Medicare tax, which has always been a flat tax and withheld from employee paychecks, has now become progressive. Taxpayers earning over $200,000 in wages or self-employment income ($250,000 for joint filers) will be subject to a Medicare tax of 2.35% as opposed to the 1.45% everyone else pays. What’s more, unlike social security taxes, Medicare taxes are not deductible for the self-employed. Ideally, your employer should have been withholding this amount if your income exceeded the $200,000 limit ($250,000 for joint filers), but it’s possible they didn’t withhold it correctly. Make sure you double check and pay any additional taxes due.
What can I do to avoid these new taxes?
It’s still not too late to take action to save on taxes. If you have a traditional IRA you should consider contributing up to the maximum $5,500 ($6,500 for filers 50 years or older) to reduce your adjusted gross income. If you have your own business, you still have up until April 15, 2014 (or October 15, 2014 if you file an extension) to setup and contribute to the plan for the 2013 tax year. You can contribute up to 20% of your self-employment income, or up to $51,000 ($56,000 for filers 50 years or older).
As for investments, you may want to consider taking a second look at municipal bonds issued by fiscally sound states. The interest income from municipal bonds is not subject to federal income tax, isn’t considered net investment income, and isn’t subject to the surtax rules. In many cases it also is not subject to state income tax. And if you live in a place like New York City and buy the city’s municipal bonds, you don’t pay local tax on the interest either.
More Questions? Ask your tax questions online or find a cpa online.
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