On the Chinese calendar, we are currently in the Year of the Snake. For U.S. tax planning purposes, many people will find that they are in the year of the Sticker Shock. Seems to be a curious coincidence of unpleasantness, doesn’t it?
Most of us who practice in the tax world are quite aware of the myriad tax changes that took effect for the 2013 tax year. Unfortunately, many taxpayers who are directly affected by these changes may not be. In fact, you may be surprised to learn that the tax landscape has shifted sharply for those who are now on the wrong side of the line between “middle class” and “higher earners.” If that does, indeed, describe you, you will now be subject to an array of new taxes, higher rates, and harsh deduction limits.
So, how has your tax landscape changed?
Starting in 2013, a couple of different pieces of legislation took effect that significantly raised taxes on higher earners, increasing the importance of tax awareness and tax planning: the Affordable Care Act (ACA) and the American Taxpayer Relief Act of 2012 (ATRA).
Although the ACA is not new legislation, 2013 is the first year in which it really began to rear its ugly head. Among its many health care related provisions, it also imposes a higher payroll tax as well as a surtax on the unearned income of higher-income individuals. For the second half of the one-two punch, the ATRA imposes higher tax rates on ordinary income, capital gains and dividends, while, at the same time, imposing limitations on the availability of both personal exemptions and itemized deductions.
For tax years beginning after December 31, 2012, the following categorical changes now apply:
- Increased payroll tax for high-earning workers and self-employed taxpayers.
- Surtax on unearned income of higher-income individuals.
- Higher individual income tax rates apply to higher-income taxpayers.
- Capital gain and dividend rates rise for higher-income taxpayers.
- Personal exemption is limited for high earners.
- Itemized deductions are limited for high earners.
A free guide entitled 2013 Tax Planning: The Year of Sticker Shock is now available for download at www.zinnerco.com to help explain what exactly these changes entail.
While many high earners will certainly pay more taxes this year than in the past, keep in mind that it’s almost never too late to start participating in the tax planning process. Even at this late date, a little planning may be surprisingly effective in minimizing one’s taxes. To explore your tax options, contact one of the tax professionals at Zinner & Co. LLP.
Howard J. Kass, CPA, AEP®, is a Tax Partner at Zinner & Co. LLP. Reach him at (216) 831-0733 or firstname.lastname@example.org.