Happy New Year – New 2013 Tax Rates and Issues for San Francisco, CA

Filed in CPA Blog by on January 14, 2013
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Happy New Year and Happy New Tax Rates for 2013!

January 2013

After much wrangling, our leaders in Washington have reached a late hour agreement on tax law increases beginning in 2013.  See the chart below which covers the highlights of the agreement that also includes an extension of some deductions and credits.

2013 Tax Rates
(Source: WSJ)

Most of the tax hikes hit those making more than $400,000 (single) and $450,000 (joint). So here is a quick guide with everything you need to know about the 2013 increases.
 
Top Federal Income Tax Rate
The top tax rate is set to rise to 39.6% for couples with adjusted gross income (AGI) of $450,000 or more and for singles with AGI of $400,000 or more. The tax brackets remain unchanged for everybody else. Please contact your Safe Harbor CPA tax advisor if you have any questions or need some help understanding how the American Taxpayer Relief Act affects your tax planning.

Increase in Capital Gains Tax
Capital gains tax rises from 15 to 20 percent for couples making more than $450,000 ($400,000 if you’re single). With the new Obama 3.8% Medicare tax on investment income beginning in 2013, the tax rates actually could increase to 18.8% and 23.8%.   These increases make tax planning all the more important.The top tax rate is set to rise to 39.6% for couples with adjusted gross income (AGI) of $450,000 or more and for singles with AGI of $400,000 or more. The tax brackets remain unchanged for everybody else. Please contact your Safe Harbor CPA tax advisor if you have any questions or need some help understanding how the American Taxpayer Relief Act affects your tax planning.

Loss of a portion of Personal Exemptions and Itemized Deductions
With this change, the new tax laws will affect those at a lower income threshold. For married couples with AGI of $300,000 ($250,000 for singles) or more, you’ll start to lose the benefit of your personal exemption and itemized deductions. The formula is a bit complicated. As a general rule of thumb, the limitation on itemized deductions (known as the Pease provision) adds one percent to the top tax bracket and top capital gains tax rate.  Likewise, the loss of a part of your exemption (known as the PEP provision) will also add one percent to your tax rate.

Increase in Social Security Tax
This impacts ALL workers and the self-employed. Over the past couple years we’ve been enjoying a 4.2% payroll tax rate for social security. This was a decrease from the standard rate of 6.2%. Beginning in 2013, the rate is going back to its 6.2% historical level. Social security tax is levied on the first $113,700 in wages for 2013 (the number is adjusted for inflation each year). So this tax hits everybody with earned income.

Increase in Estate Tax
The estate tax rate will rise from 35 to 40 percent for estates over $5 million (or $10 million for a married couple).

We'll follow up with the key tax deductions that were also included in the tax bill.  As the year progresses, we'll share additional information and how to plan under these new tax rules.

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