If you surveyed 100 people about the recent tax changes, 95 of them probably will mention the capital gains and income tax rate increases at a certain level, but those are the two changes that may have the least effect, says Bruce Friedman, CPA, director in assurance at SS&G.
“There were a couple of items that the publicity focused on, and therefore the general public focused on, which, based on my experience with taxes, aren’t necessarily going to be as big of an issue as some of the subtle items out there,” he says.
Smart Business spoke with Friedman about some overlooked tax changes that could really have an impact on your 2013 tax bill.
What has been emphasized that won’t necessarily have a large impact?
The higher tax bracket at certain income levels and the new capital gains rate will likely affect people less than they think.
A taxpayer calculates tax in two ways — on normal income tax rules and the alternative minimum tax (AMT) — and then pays whichever is higher. The higher tax bracket and increased capital gains rate both apply on the income tax side to those earning $400,000, or $450,000 if married and filing jointly. However, generally speaking, people whose incomes are between $150,000 and $600,000 likely already pay at the AMT rate, and these two changes, therefore, aren’t likely to raise their income taxes to more than AMT. Those who have closer to $1 million of income will be affected.
What should taxpayers know?
Certain phase-outs have been brought back — the phase-out of itemized deductions and the loss of personal exemptions if your income is more than $300,000 for those married and filing jointly. However, many people who itemize on their returns aren’t aware because it hasn’t been publicized. It’s not dollar for dollar, but you lose some.
Also not renewed was the payroll tax ‘holiday.’ In 2011, all employees had their Social Security tax withholding rate decreased from 6.2 to 4.2 percent, which was renewed through 2012. Nonrenewal means reductions to your regular paycheck.
Is the health care reform surtax a concern?
This year there are new surtaxes on wages and unearned income because of health care reform, where AMT has no impact.
For the wages portion, if you’re married, filing jointly and your adjusted gross income exceeds $250,000 ($200,000 if you’re single) you pay an added 0.9 percent on the excess. For a married couple making $300,000 annually, it’s an added $450 per year.
The bigger impact is the unearned income tax of 3.8 percent, which applies to interest, dividends, capital gains and passive net rental income for the same $250,000 and $200,000 of adjusted gross income. As the owner of a business that generates a Schedule K-1 tax form relative to a passive activity, this could be a concern because that K-1 may have taxable net rental income, which could be included in this calculation. A typical example is where the business pays rent to the business owner who owns the property; many owners set up separate rental activities because it was a method to get cash without paying payroll taxes.
Here’s how the unearned income surtax could work: A married, filing jointly couple has $200,000 of earned income and $100,000 of unearned income. They are only taxed on unearned income that put them over $250,000 — $50,000, but that’s an additional $1,900 in taxes per year.
What can be done to lessen the impact?
There’s not much to be done aside from perhaps adjusting your business’s rental income. Many business owners may have charged on the high side of rent, but now — especially with lower real estate values — it might be worth revisiting the rent the business is paying.
The key point is to know the true dollar amount of your 2013 taxes. For example, the person who has a taxable income of $425,000 might be thinking, ‘No change in rates, I’m good.’ But if that taxpayer has $200,000 of unearned income, it’s another $7,600 in taxes.
What’s the good news?
Some positive business-oriented things were continued, such as accelerated depreciation, which lets you write off up to $500,000 in assets, up to $2 million in expenditures, as well as extending the R&D credit that can offset against AMT.
Bruce Friedman, CPA, is director in assurance at SS&G. Reach him at (330) 668-9696 or BFriedman@SSandG.com.
Website: For detailed 2012-2013 tax planning tips, see our online WebTaxGuide.
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