With the enactment of the American Taxpayer Relief Act on Jan. 2, your 2013 tax return may look very different from last year’s. We asked local tax and financial experts to share some reminders for 2012 and advice for maximizing your tax outcome in 2013.
Betsy Dow, principal and CPA, Moneta Group
--With the tax rate increases, it is important to understand what income bracket you fall into—for those over $450,000, the tax rate is returning to 39.6 percent. You want to know how the numbers will work out for you—it can help direct you in your investment and planning choices.
--Depending on your income bracket, consider stocks that pay dividends. The capital gains and qualified dividend maximum tax rates will remain at 15 percent, except for those above $450,000—they will pay 20 percent (plus the 3.8 percent Medicare tax). However, in this low interest rate era, many stocks will pay dividends that are higher than you can get on most anything else. There is risk in the fluctuations of the market, but you may be able to get a higher dividend payout and the 23.8 percent tax rate is much less than the 39.6 percent you’ll pay on ordinary income.
--There were many questions about what was going to happen with estate taxes in 2013. The exemption level has been established at $5 million, so a husband and wife can die with a $10 million estate without paying estate taxes. That threshold has been made permanent and will be adjusted for inflation every year (currently at $5.25 million).
--Some residential energy credits have been extended, for household items like energy efficient windows, doors, air conditioning, etc. Keep that in mind when undertaking home improvements.
--Certain higher education tax credits—the American Opportunity Education Tax Credit and Higher Education Tuition Deduction—have been extended. In addition, for parents who are saving for their children’s education, the Coverdell Education Savings Account was restored by the new tax laws. A Coverdell allows for up to $2,000 in annual contributions to an account that can be used tax-free for qualified expenses from kindergarten through college. Before the extension, the contribution limit would have fallen to $500 per year to be used only for college.
David Stubblefield, financial planner, Commerce Trust Company
--If you qualify for a deductible IRA contribution, you have until April 15 to do that with your tax return for 2012. In addition, if you’re self-employed, you still have the opportunity to contribute to a SEP (Simplified Employee Pension) IRA for 2012.
--Instead of expiring as scheduled, the qualified charitable IRA distribution has been restored for 2013, and retroactively engaged for 2012. People older than 70 1/2 who have to take most out of their IRA every year may make a tax-free distribution to the charity of their choice. You can still do so for 2012 as long as you make the distribution by Feb. 1. And if you already took money out in 2012, a charitable contribution in this new timeframe still would qualify.
--The Social Security tax holiday is over. The tax rate was reduced to 4.2 percent for two years, but it is now back to 6.2 percent, which took effect on your first paychecks of 2013.
--If your adjusted gross income (for a married couple filing jointly) is below $250,000, your tax rules are essentially the same as 2012.
--When your income rises above $300,000, both itemized deductions and personal exemptions will have a phase-out formula, which will raise your taxable income. As the income gets higher, your personal exemptions can be phased out completely and itemized deductions phased out up to 80 percent.
--With the new tax laws, tax efficiency is going to be more important than ever. I recommend sitting down with your tax adviser and getting an understanding of how your income will be impacted by the various layers of the new laws.