S&P Capital IQ Financial Communications Tax Guide. What You Need to Know About the New Rules

Transcription

1 S&P Capital IQ Financial Communications 2013 Tax Guide What You Need to Know About the New Rules

2 Tax Guide 2013 This guide is not intended to be tax advice and should not be treated as such. Each individual s tax situation is different. You should contact your tax professional to discuss your personal situation.

3 Tax Guide QUICK REFERENCE Introduction New for 2013 Income Tax Rates Dividends and Capital Gains The Alternative Minimum Tax IRAs and Employer-Sponsored Retirement Plans Education Tax Advantages Estate, Gift, and Generation-Skipping Taxes

4 INTRODUCTION 2013 dawned with the first categorical income tax increases in two decades. Income tax rates for the highest-income wage earners increase this year while rates for most others hold steady. Taxes on dividends and capital gains are higher for some taxpayers, and the temporary rollback in the Social Security payroll tax was allowed to expire. The alternative minimum tax is now indexed for inflation, lessening that risk of potential tax burdens for some taxpayers. Among the other changes on tap for 2013 are an increase in the estate tax, new limits on the use of exemptions and deductions for upper-income taxpayers, and a new Medicare tax on unearned income. Details of these changes and more are summarized in this 2013 Tax Guide. This guide can help you understand the current state of the law so you can use the best information available as you plan. Of course, before you act on anything, you should consult a tax professional about your personal situation. And keep in mind that the information in this guide is subject to change at any time, especially given the volatile political background, which may result in more changes as budget deficits and spending issues are addressed. Ultimately, there can be no guarantees about what Congress may do with the tax code in the weeks and months ahead, so be sure you are acting only with the most definitive and current information in mind. Please keep in mind that in federal tax discussions, the terms married, spouse, and spousal pertain only to couples that can be recognized as married by federal law. 2

5 NEW FOR 2013 Medicare Taxes Unearned Income Tax A new 3.8% tax on unearned income goes into effect this year. The tax applies to net investment income, which includes interest, dividends, royalties, annuities, rents (and other passive activity income), capital gains from the sale of property other than that used in an active trade or business, and trading of financial instruments and commodities. In general, the tax applies to single taxpayers with a modified adjusted gross income (MAGI) of $200,000 or more and to those who are married and filing jointly with a MAGI of $250,000 or more. Importantly, net investment income does not include distributions from IRAs or qualified retirement plans, annuity payouts, or income from tax-exempt municipal bonds, among other items. But, except for Roth account distributions, retirement plan proceeds and annuity income are generally included in the MAGI calculation, so a hefty plan payout can trigger liability on your taxable investment assets if it pushes you over your MAGI threshold. Among the possible strategies for managing your exposure: converting your traditional IRA or 401(k) account to a Roth and reallocating your existing taxable fixed-income portfolio to tax-advantaged municipal bonds. But be aware that not all municipal bonds necessarily qualify for the exemption and some may also trigger the alternative minimum tax (AMT). And remember that the costs of a Roth conversion may outweigh any potential benefit from reduced Medicare tax exposure. Earnings Tax Taxpayers whose income level makes them liable for the new unearned income tax may also be liable for a new 0.9% tax on earned income above the same thresholds. The tax will be withheld from wages and salaries over $200,000. Actual tax liability will be calculated in tax-year 2013 returns. 3

6 INCOME TAX RATES Each tax rate indicated below applies to a tier of your income, with the lowest portion taxed at 10%, the next threshold taxed at 15%, and so on. Keep in mind that the indicated income levels are the amounts that remain after adjustments, exemptions, and deductions. For 2013, many exemptions and deductions will be gradually phased out for taxpayers at higher income levels. Rates on Ordinary Income for the 2013 Tax Year* Single $0 $8,925 $0 + 10% $8,926 $36,250 $ % over $8,925 $36,251 $87,850 $4, % over $36,250 $87,851 $183,250 $17, % over $87,850 $183,251 $398,350 $44, % over $183,250 $398,351 $400,000 $115, % over $398,350 $400,001 and higher $116, % over $400,000 Married Filing Jointly or Qualifying Surviving Spouses $0 $17,850 $0 + 10% $17,851 $72,500 $1, % over $17,850 $72,501 $146,400 $9, % over $72,500 $146,401 $223,050 $28, % over $146,400 $223,051 $398,350 $49, % over $223,050 $398,351 $450,000 $107, % over $398,350 $450,001 and higher $125, % over $450,000 Head of Household $0 $12,750 $0 + 10% $12,751 $48,600 $1, % over $12,750 $48,601 $125,450 $6, % over $48,600 $125,451 $203,150 $25, % over $125,450 $203,151 $398,350 $47, % over $203,150 $398,351 $425,000 $112, % over $398,350 $425,001 and higher $121, % over $425,000 *Source: Internal Revenue Service Rev. Proc

7 DIVIDENDS AND CAPITAL GAINS Capital Gains The federal tax rate on long-term capital gains typically is determined by your marginal ordinary income tax rate. The maximum rate on long-term gains is 20% and applies to those in the top income tax bracket. Individuals in the 25% to 35% brackets will be subject to a 15% long-term capital gains rate. Those in the 10% and 15% brackets have a 0% capital gains rate. Rates on long-term capital gains apply to gains resulting from the sale of stocks, mutual fund shares, and other assets held for more than one year. Short-term capital gains on assets held for one year or less are taxed at ordinary federal income tax rates. Dividends Dividends are taxed at the taxpayer s applicable capital gains tax rate. Tax Rates on Investment Income Earned in 2013 Short-Term Capital Gains 10% 15% 25% 28% 33% 35% 39.6% Long-Term Capital Gains and Qualified Dividend Tax Rates 0% 0% 15% 15% 15% 15% 20% Keep in mind that the new 3.8% Medicare tax applies to qualified dividends and capital gains, effectively increasing the tax rate for some taxpayers. 5

8 THE ALTERNATIVE MINIMUM TAX The federal alternative minimum tax (AMT) was established more than 30 years ago to ensure that wealthy Americans couldn t use unusually large tax deductions and business expense subsidies to avoid paying income taxes. For 2013, inflation adjustments have become a permanent part of the basic AMT calculation formula. In years past, inflation adjustments were generally made retroactively, often at the last possible moment. For income earned in 2012 and reported on tax returns filed this year, the basic exemption amount is $50,600 for individuals and $78,750 for couples. For income earned during 2013, the exemption amounts are $51,900 for singles and $80,800 for couples. AMT Exemption* Single filers Joint filers Married filing separately 2012 $50,600 $78,750 $39, $51,900 $80,800 $40,400 *Source: Internal Revenue Service. Planning Tip: If you re subject to the AMT, you may face stricter limits on medical expense deductions, use of tax credits, and tax-exempt interest. Consult your tax professional for information about the AMT and how it relates to your situation. 6

9 IRAs AND EMPLOYER-SPONSORED RETIREMENT PLANS Annual contribution and income limits for IRAs and employer-sponsored retirement plans are determined annually in October based on the published rate of inflation for the previous year. Investors aged 50 and older get a bonus: an annual catch-up contribution that permits them to potentially accumulate even more. You can make your 2012 contribution to a traditional or Roth IRA anytime until April 15, For the 2013 tax year, your contribution can be made anytime between January 1, 2013, and April 15, IRA Contribution Limits Tax Year Maximum Annual IRA Contribution $5,000 $5,500 To be determined Catch-Up Contribution $1,000 $1,000 To be determined Planning Tip: Taxpayers at any income level are now permitted to convert a traditional IRA to a Roth IRA. Whether a conversion is right for you will depend in part on the amount of time you plan to leave the assets invested. The further you are from retirement, the longer your earnings can grow tax free, and the more time you will have to compensate for the associated tax bill, which now must be paid in full the year you convert. 7

10 Contributions to a traditional IRA may be tax deductible, depending on your income level and whether or not you (or your spouse) are covered by an employer-sponsored retirement plan at work. Filers who are not covered by an employer-sponsored retirement plan (and, if married, whose spouses are also not covered) may deduct their contributions regardless of their income level and filing status. All other filers may only deduct traditional IRA contributions if their income falls below certain limits. (In each category, the deduction value phases in gradually below the absolute limit.) For tax filers who are covered by employer-sponsored plans, these limits are: $69,000 for those filing as single or head of household, $115,000 for married taxpayers filing jointly, and $10,000 for married taxpayers filing separately. For a married taxpayer filing jointly who is not covered by a plan but whose spouse is covered, the limit is $188,000. For a married taxpayer filing separately, the limit is $10,000. Contributions to a Roth IRA also have limitations based on income and filing status. The amount of the permitted contribution is phased in below these limits. For taxpayers filing as single or head of household, the Roth qualification limit is $127,000 in For those married filing jointly, the limit is $188,000. For those married but filing separately, the limit is $127,000 if you did not live with your spouse at any time during the year. Otherwise, it is $10,000. Please keep in mind that all of these limits refer to the modified adjusted gross income reported on the return. 8

11 Contribution Limits for Employer-Sponsored Retirement Savings Plans If you are eligible to participate in an employer-sponsored retirement plan, you may want to determine the maximum you are permitted to contribute on a pre-tax basis and whether a catch-up contribution may apply. The amounts in the table below are government maximums, but your employer may impose lower limits. 401(k), 403(b), and 457 Plan Contribution Limits Tax Year Maximum Annual Contribution $17,000 $17,500 Indexed to inflation Catch-Up Contribution $5,500 $5,500 Indexed to inflation SIMPLE Plans Individuals who contribute to SIMPLE plans for small-business owners and employees may make a maximum annual contribution of $12,000 in Future limits will be indexed to inflation. Participants who are age 50 and older may be able to make a catch-up contribution of $2,500 in

12 EDUCATION TAX ADVANTAGES Families who hope to send children to college, as well as those paying education expenses at the elementary and secondary levels, may benefit from the tax rules outlined below. Coverdell Education Savings Accounts Earnings on investments in Coverdell accounts are not taxed, and withdrawals are federally tax free as long as they are used for qualified education expenses. You may contribute $2,000 annually per child under the age of 18. The contribution deadline is the same as that for traditional and Roth IRAs tax -filing deadline of the following year. (You have until April 15, 2013, to contribute for the 2012 tax year, and contributions for 2013 can be made anytime between January 1, 2013, and April 15, 2014.) Single taxpayers with modified adjusted gross incomes of more than $110,000 and joint filers with incomes in excess of $220,000 are not eligible to contribute to Coverdell accounts. 529 Plans These college savings accounts permit investors to accumulate aggregate amounts of up to $200,000 or more for higher education, depending on the plan. Withdrawals used to finance qualified higher education expenses are federal tax free. There are no income thresholds and typically no annual contribution limits, although contributions of more than preset limits could potentially trigger the federal gift tax. Investors can transfer assets from one 529 plan to another on behalf of the same beneficiary without paying taxes on the distribution. Planning Tip: Money in a 529 plan is removed from your taxable estate. You may contribute five years worth of gifts all at once, or $70,000 per beneficiary, without triggering the federal gift tax. To meet this condition, you must not provide additional gifts to the same beneficiary during the remainder of the five-year period. 10

13 ESTATE, GIFT, AND GENERATION-SKIPPING TAXES Estate and gift tax policy achieved a new level of predictability in the wake of the fiscal cliff tax compromise reached this year on New Year s Day. The maximum estate tax rate is 40%. The base exemption amount ($5.25 million in 2013) for each individual was made permanent and may be adjusted for inflation in future years. Estate assets may be transferred to a surviving spouse who is a U.S. citizen without tax. A surviving spouse may also inherit any unused applicable exclusion amount. For accounting purposes the limits applied to estate taxes can be unified with those applied to gift taxes. Gifts totaling $14,000 to a single beneficiary in a single year are considered tax free. Within certain limits, gifts above the tax-free amount may be included in the taxpayer s estate tax exemption rather than being subjected to immediate taxation. The tax rate and exemption amounts for the generationskipping tax (GST) are the same as those for the estate tax. However, any unused GST exemption cannot be transferred to a surviving spouse. Estate Taxes Maximum rate Exemption % $5.12 million 2013 and beyond* 40% $5.25 million *Exemption amounts may be adjusted for inflation in future years. 11

14 ESTATE, GIFT, AND GENERATION-SKIPPING TAXES Gift Tax Taxpayers are allowed to make limited gifts tax free each year. The tax-free annual exclusion amounts indicated in the table below apply individually to each combination of giver and recipient. For example, each grandparent can give a child or grandchild the full exclusion amount tax free each year. In the same vein, a friend or family member can give each child in a family a gift valued at the maximum exclusion amount without creating a gift tax liability. Gift Taxes Annual tax-free gift per recipient Maximum rate (on amounts above the applicable exclusion amount) Applicable exclusion amount 2012 $13,000 35% $5.12 million 2013 and beyond* $14,000 40% $5.25 million *Exclusion amounts may be adjusted for inflation in future years. 12

15 Work With a Professional It is important to remember that tax laws are extremely complex and fluid. Many laws can even be altered retroactively. This makes it especially vital that you discuss your personal situation with your tax professional before taking any action. 13

16 TD Ameritrade Institutional does not provide tax advice. Clients should consult with a tax-planning professional with regard to their personal circumstances. TD Ameritrade Institutional and S&P Capital IQ are separate unaffiliated companies and are not responsible for each other s services or policies. Reprinted with permission S&P Capital IQ Financial Communications. All rights reserved. Reproduction in whole or in part is prohibited without the express permission of S&P Capital IQ Financial Communications. Contact us at or