Deal on Taxes Hits Wealthy in New Jersey and New York

lya Marritz over at WNYC News has written: As 2013 begins, you can expect to pay more taxes as a result of the deal Congress reached on New Year's Day. But not everyone's taxes go up equally, and different regions of the country are affected different ways.

 
WHO IS AFFECTED
Rich people. Around 22,000 New Yorkers earn $1 million or more a year, and people in this category will bear the brunt of new taxes. The top income tax rate on earnings above $400,000 (for individuals) and $450,000 (for families) rises from 35% to 39.6%.
 
NOT ALL RICH ARE AFFECTED EQUALLY
The capital gains tax rate will rise from 15% to 20%, the same as it was at end of the Clinton Administration.  This will particularly affect large number of New Yorkers and New Jerseyans working in hedge funds, private equity, and other industries where workers' income comes mainly from investments, not wages.
 
CHARITABLE GIVING COULD BE AFFECTED. OR NOT.
Itemized deductions will be limited for high earners under the new agreement.
It's complex, but for individuals who make over $250,000, or families couples making over $300,000, for each dollar in of additional income, itemized tax deductions will be reduced.
Some tax-scholars say the change probably won't reduce overall charitable giving. But one major philanthropist – Mayor Michael Bloomberg - emphatically disagrees.
“In a world where we are defunding education and the arts and social services both at the state and federal level, to make it more difficult for people to give charitable contributions is about as crazy a thing as I've ever heard,” Bloomberg said on Wednesday.
 
EVEN LOW- AND MIDDLE INCOME PEOPLE WILL PAY HIGHER TAXES
That's because payroll taxes — the taxes that fund social security - were temporarily lowered as an economic stimulus. Now they will go back up, rising by two percent. The New York City Comptrollers estimates New Yorkers will pay $868 more in taxes in 2013.
Congress, however, did extend for five years some programs that help the poor and working class, including the Earned Income Tax Credit and Child Tax Credit.  Long-term unemployment insurance was also extended; more than 300,000 people in New York and New Jersey were at risk of losing benefits.
 
WHAT’S NEXT
Even though Congress reached a deal on revenue, they couldn't agree on spending cuts.
If there's no agreement within two months, automatic cuts will kick in. New York State Comptroller Thomas DiNapoli said New York will lose more than $600 million in federal aid for housing, education, and healthcare.

ExactCPA Commentary.  Top income bracket taxpayers will be impacted by new fiscal cliff legislation increasing the top individual tax rates for this group.   New Jersey and New York are the 3rd and 16th richest states respectively according to 247wallstreet.com.  This is based on 2011 median household income.  That being said, it looks like proportionately more taxpayers will be affected by the new rate increases on high-income tapayers than those in other parts of the country.  Tax planning will be important for the taxpayers this year as they begin to navigate the new higher tax rates.

10 Smart Tax Strategies for 2013 - Kay Bell @ Bankrate

Kay Bell over at Bankrate.com has written:  It's said the only constant in life is change, and that's definitely the case with taxes. That was made very clear during the tax debates associated with the "fiscal cliff." But all the tax-rate-increase and spending-cut chaos that accompanied fiscal cliff discussions is just part of the picture. Here are 10 tips for taxpayers in 2013.

Tip 1: Get ready to wait

Remember the delays in 2011 when some taxpayers had to wait until mid-February to file their returns because of the late passage of tax laws? Expect the same in 2013. Whether Congress passes new tax laws late in the year or even after the end of a calendar year, the Internal Revenue Service needs time to reprogram its computers to account for the changes. Former IRS Commissioner Doug Shulman, who completed his term just before the presidential election, warned about delays as far back as March 2012. In November, acting IRS Commissioner Steven Miller wrote to the leaders of the House and Senate tax-writing committees, alerting them that the filing of tax returns by as many as 69 million taxpayers could be delayed, some possibly as late as March 2013, because of procrastination by Congress. Most of the inconvenienced taxpayers would be those affected by the alternative minimum tax.

Tip 2: Watch out for the 3.8% Medicare investment tax

Several new taxes created as part of the Patient Protection and Affordable Care Act, popularly known as Obamacare, take effect in 2013. The major new tax is a 3.8 percentage point surtax on investment income earned by wealthier taxpayers. Single taxpayers making at least $200,000 and households making $250,000 or more would see this tax added to their investment earnings. Unearned income that will be subject to the new tax includes interest, dividends, capital gains, annuities, royalties and rents. Distributions from individual retirement accounts are exempt from the surtax, but since they are taxable (at your ordinary income tax rate), the retirement account money could increase your adjusted gross income and possibly push you into the Medicare surtax area.

Tip 3: Take note of the 0.9% Medicare payroll tax increase

In addition to the Medicare surtax on investment income, individuals who make more than $200,000 ($250,000 for joint filers) in 2013 will see a new 0.9% Medicare payroll tax taken out of their paychecks on the amounts earned over their filing status thresholds. Self-employed workers will have to figure the added payroll tax on their earnings, too.

Tip 4: Monitor your medical expenses

A major shortcoming of the itemized medical expenses deduction is that you must rack up enough qualified costs to be able to claim the amount on Schedule A. In 2013, again as part of the health care law, you'll need even more. For the 2012 tax year, you can deduct only the amount of medical and dental expenses that exceed 7.5% of your adjusted gross income, or AGI. In 2013, you must have qualified medical expenses that are more than 10% of your AGI. Taxpayers age 65 or older, however, can still use the 7.5% threshold through 2016.
If you plan to get around the higher deduction threshold by using a flexible spending account, or FSA, to pay for unreimbursed medical costs, that's still a good 2013 tax strategy. But as you learned when you signed up for your medical FSA during your workplace benefits enrollment period, you can only put up to $2,500 into the account. So, plan accordingly for expenditures of this reduced amount.

Tip 5: Determine whether your insurance rebate is taxable

Last fall, health insurers issued more than $1 billion in premium refunds to nearly 13 million consumers. The payments, officially known as medical loss ratio, or MLR, rebates were required by the Affordable Care Act in cases where health insurers did not spend at least a certain percentage (generally 80% to 85%) of the prior year's health insurance premiums on health care services. The rebates issued in August 2012 covered premiums collected for the 2011 plan year. And in some cases, the rebates are taxable. The general tax rule is that if you got a tax break for the money and then got some of it back, the Internal Revenue Service wants to collect its portion. So, for example, if you paid for your medical insurance and itemized those premiums as part of your medical deductions, at least a portion of the rebate is taxable. The IRS has a frequently asked questions Web page with more on the various insurance rebate payment methods and taxability issues.

Tip 6: Note your company health coverage's value

One more health care act tax provision will show up on your 2012 Form W-2 that your employer is required to send you by the end of January. In Box 12, you'll see how much your workplace-provided medical coverage is worth. Don't worry. You don't have to include the amount, which will have the explanatory code DD next to it, on your tax return. It's for informational purposes only. The IRS will use this data to help it enforce the eventual individual coverage mandate (effective in 2014), as well as collect the so-called Cadillac tax on more expensive workplace insurance plans (effective in 2018).

Tip 7: Pay your 2010 Roth IRA conversion taxes

If you converted a traditional IRA to a Roth account in 2010, you were able to spread any conversion tax payments equally over two subsequent tax years. Your first payment was due with your 2011 tax filing. The second half is due with your 2012 return.

Tip 8: Maximize your workplace retirement plan

Speaking of retirement savings, don't overlook your 401(k) plan. Your contributions are made via payroll deductions before your withholding taxes are calculated, so in addition to saving for retirement, you shave a bit off your tax bill. Many companies make matching contributions to employee accounts. That's basically free retirement money. And the total earnings in the account grow tax-deferred. Each year the IRS reviews the maximum amount that workers can contribute to their 401(k)s and, if warranted, adjusts the contribution levels for inflation. In 2013, you can contribute up to $17,500 to your 401(k). If you're 50 or older, you can add an extra $5,500, allowing a worker who is closer to retirement to contribute as much as $23,000 in a 401(k).

Tip 9: Find a tax professional

Tax laws change every year. And too often, the changes are made late in a tax year, giving you very little time to adjust. If 2013 is the year you decide to get professional help in deciphering the late-breaking and convoluted tax laws and filing your return, start searching for a tax pro now. You have plenty of time to determine which tax professional best fits your tax needs and then thoroughly check out the tax adviser before hiring.

Tip 10: Take your time

Here's one more adage to keep in mind as an important tip for taxpayers: Haste makes waste. That can be true and costly when it comes to taxes. Although the filing deadline is April 15, you can get more time to finish your tax forms. If you need it, take it by filing for an extension with Form 4868. Remember, if you owe a tax bill, you must send in that amount (or close to it) by April 15 or you could end up owing more in late-payment penalty charges.

ExactCPA Commentary: Kay Bell provides some additional insight for tax strategies that might be helpful in the new calendar year.  As noted in our commentary this wee, many of these are related to the legislature surrounding the Patient Protection and Affordable Care Act that go into effect in 2013.  Healthcare is surely to be a closely monitored item when folks are looking at their tax situation this year.

Maximizing your workplace retirement plan should be on the top 10 list every year, given the tax benefits that it has.  The matching contributions that many employers provide are especially beneficial.  Please don't leave money on the table.  At a minimum, please try to contribute enough to enjoy the maximum matching contribution provided by your employer.
Tip #9 is especially near and dear to my heart.  Finding a tax professional.  With all the change in legislations, it is difficult for anyone to decipher.  Finding a qualified tax professional to assist you with the process is a worthy investment.  

I hope everyone's new year is off to a great start.  If you have any questions or comments, I would love to hear from you.   

Additional Medicare Tax on High-Income Taxpayers – Part 4

Additional Medicare Tax on High-Income Taxpayers – Part 4

Thanks for coming back to read part 4 of our commentary of items from the Health Care
Reform Act that will come into effect starting in 2013. If you missed the first 3 part os our
commentary you may view them here. Today we will discuss the impact of the Additional
Hospital Insurance Tax, also known as the Additional Medicare Tax. The 0.9 percent tax will
be imposed in addition to the already in place 1.45 percent Medicare wages for certain “high-
income” taxpayers. This additional tax will be imposed on any taxpayer (with the exception
of corporations, trusts, and estates) who receive wages with repsect to employment during any
tax year beginning after December 31, 2012, in excess of $200,000 ($250,000 for a joint return
or $125,000 for those filing separately), as originally stipulated in the Patient Protection and
Affordable Care Act and amended by the Health Care and Education Reconciliation Act of 2010.

For taxpayers earning more than $200,000, the employer should withhold the additional amount
to meet the requirement. At the end of the day, however, it is the responsibility of the taxpayer
to ensure that this requirement has been met. There may be situations for married couples
who individually make less than $200,000, but jointly make in excess of $250,000, to find it
necessary to make estimated payments in order to cover the additional tax. For example, if
spouse A makes $100,000 and spouse B makes $175,000, they would be subject to the additional tax, but neither would have had the additional tax withheld by their employer. Please consult your tax adviser if you find yourself in this situation.

Please note that the 0.9 percent additional tax also applies to self-employed taxpayers.
Unfortunately, the one-half of self-employment taxes which are deductible under Code Sec.
164(f) do not include the additional Medicare tax.

The additional Medicare tax will require practitioners to monitor their clients’ situation carefully
as it relates to this new tax payment requirement. In addition, many practitioners feel that there
will be an uptick in the taxpayers incorporating under the provisions of subchapter S as active S
corporation income would not be subject to this additional payroll tax.

2013 will prove to be an interesting year for both tax practitioners and taxpayers alike as it
relates to the new tax provisions. As always, please work with your tax adviser to determine
steps you should take.

On November 30, 2012 the IRS and Treasury released proposed regulations to help employers
and individuals implement the new tax. You may review the proposed regulations by following
this link:

http://www.gpo.gov/fdsys/pkg/FR-2012-12-05/pdf/2012-29237.pdf

This is a continuation, from Part 3 located here

http://exactcpa.blogspot.com/2013/01/medical-care-itemized-deduction.html

This is a continuation, from Part 2 located here
http://exactcpa.blogspot.com/2012/12/allowable-contributions-to-health.html

Which is a continuation, from Part 1 located here
http://exactcpa.blogspot.com/2012/12/what-does-2013-mean-for-you-in-terms-of.html