Was your 2013 tax bill higher than you expected? You can probably thank the American Taxpayer Relief Act of 2012. “RELIEF” is a misnomer. Reality is several changes are what tax professionals refer to as stealth taxes – under the radar burdens that are hard to see coming. These stealth taxes primarily affect high income earners.
This posting will begin a review of these changes and a refresher of a few other tax laws. The purpose is to give you a big picture of potential tax problems and how your actions like selling a stock, getting a promotion or raise, or exercising a stock option affect your tax bill.
An additional tax rate of 39.6% was added.
The tax rates for 2014 incomes are as follows:
Tax Rate Single Married (Filing Joint)
39.60% $406,750-and over $457,601 - and over
35.00% $405,101-$406,750 $405,101 -$457,600
33.00% $186,351-$405,100 $226,851 -$405,100
28.00% $89,351-$186,350 $148,851 -$226,850
25.00% $36,901-$ 89,350 $73,801 -$148,850
15.00% $9,076-$ 36,900 $18,151 -$ 73,800
10.00% $0-$ 9,075 $0 -$ 18,150
Tip: Even if you are not in the top tax bracket, you need to pay attention to your taxable income. Additional investment income, IRA withdrawals and rental income can move you into the next tax bracket.
In addition to resurrecting the top tax bracket of 39.6%, Congress passed in the Affordable Care Act,.9% Medicare tax on wages and self-employment income. This tax is applied to Modified Adjusted Gross Income of $200,000 for singles and $250,000 for married couples. This one especially can catch married couples by surprise. Your employer withholds the Medicare tax on your wages. However, the employer is only responsible for the taxes on one spouse. An employee’s wages may be under the $250,000 threshold. However, combined with the spouse’s income, they may have income over the $250,000 and subject to the.9% Medicare tax. This is a stealth tax.
Tip: Estimated taxes may be needed – or consider increasing your Federal Withholding to avoid underpayment penalties.
Another stealth tax law is the phase out of the personal exemptions.
Taxpayers receive $3,900.00 exemption for each dependent they claim. As income increases above the threshold, the exemptions disappear.
Filing Status Phase Out Begins Phase Out End
Single $254,200 $376,700
Married, Filing Joint $305,050 $427,550
The child tax credit also has an income limit. You may receive $1,000 tax credit for each child until they reach the age of 17. A tax credit is a dollar for dollar offset against your tax liability. This credit also has a phase out. The starting point for the phase out is in this chart. The end of the phase out will increase with each eligible child. So phase out for married and 2 children is $149,001 as compared to one child at $129,001.
Filing Status Phase Out Begins
Single $ 75,000
Married, Filing Joint $110,000
Itemized deductions are under attack. If you are married and have an Adjusted Gross Income of $300,000, your itemized deductions begin to phase out. If you are single, that threshold is $250,000. The standard deduction, the alternative to itemized deductions, does steadily increase each year. For 2014 – Married, filing joint, the standard deduction is $12,400 and for singles it is $6,200.
While Congress has suggested tax law changes modifying allowable mortgage interest deductions and charitable contributions, special interest groups have been quick to remind representatives the source of their campaign contributions. We aren’t likely to see tax law changes anytime soon.
Another stealth tax is in your deductible portion of your medical expenses. To deduct out of pocket medical expenses, prior years you had a threshold of 7.5% of your Adjusted Gross Income. That percentage has been increased to 10%.
For seniors, that increase to 10% has been delayed until 2016 (after another presidential election year).
Tip: You may consider health savings accounts to make out of pocket medical expenses deductible if your employer doesn’t provide a pretax medical expense plan.
A stealth tax that disappeared for middle income tax payers is the Alternative Minimum Tax (AMT). The AMT is calculated using a different set of tax rules than those used for regular taxes. Under the AMT rules, some deductions taken for regular tax are not allowed (or are limited). Also, certain income and expenses are recognized under different rules for AMT.
This tax is designed to be sure everybody pays their “fair share of taxes.” It usually applies to high income tax payers. It hasn’t been indexed to inflation, so over the years, middle income taxpayers are experiencing the AMT. Congress finally put in a permanent fix on the AMT and indexed it to inflation. Fewer taxpayers should encounter this stealth tax.
This isn’t intended to be a comprehensive review of the current tax law.
You should consult your tax professional.
Securities and advisory services through KMS Financial Services, Inc.