Information About the Upcoming Tax Changes for 2013

Unless Congress takes action, the Bush tax cuts will expire at the end of the year and the individual federal income tax will increase significantly in 2013. In addition, a new 3.8% Obamacare tax on investment income collected by higher-income Americans is also scheduled to take effect next year. Here are some highlights to be aware of for the upcoming tax changes.

Impact of Expiration of Bush Tax Cuts on Higher-Income Investors
For 2013 and beyond, the maximum federal rate on most long-term capital gains will increase up to 20%. In addition, dividends will be taxed at regular rates, which could be as high as 39.6%. The phase-out rules for personal and dependent exemption deductions and itemized deductions are also scheduled to return.

Additional 3.8% Medicare Tax on Investment Income
For 2013 and beyond, higher-income taxpayers may also be forced to pay an additional 3.8% Medicare tax on all or part of their net investment income, which is defined to include long-term gains and dividends. Net investment income is the sum of:

  • Net gains from property held for investment
  • Gross income from dividends
  • Gross income from interest
  • Gross income from rental activities
  • Gross income from royalties
  • Gross income from annuities
  • Gross income from passive business activities
  • Gross income from the business of trading in financial instruments or commodities

Minus deductions that relate to the above income categories.

Maximum Tax Rates on 2013 Investment Income
The following maximum federal rates will apply in 2013 unless something changes:

  • 23.8% (20% + 3.8%) maximum rate on net long-term capital gains (versus only 15% for 2012).
  • 43.4% (39.6% + 3.8%) on net short-term capital gains (versus 35% for 2012).
  • 43.4% (39.6% + 3.8%) on income from dividends, interest, rental activities, royalties, and annuities (versus 15% on dividends and 35% for the other types of income in 2012).
  • 43.4% (39.6% + 3.8%) on ordinary income from passive business activities and ordinary income from the business of trading in financial instruments or commodities (versus 35% for 2012).

Planning to Minimize the Pain
By unloading selected appreciated assets on gains that would be subject to higher tax rates in 2013, you’ll avoid getting hit with the future tax rates.

Please click here for further information about this topic. Consult the professionals at Melton & Melton, LLP on exactly which tax-planning steps are right for you.