As we enter into autumn, we see the leaves change colors and the squirrels prepare for winter. We may want to take a lesson from the squirrels and put some extra funds aside in anticipation of any extra tax burden that may come due on April 15, 2014.
This year, a number of income tax changes went into effect. These changes could increase your federal income tax bill. In some cases, your employer may not be obligated to withhold the full amount of payroll tax or you may not have adjusted your estimated tax payments to account for these tax changes. Changes that may impact you are described below.
Additional Medicare Health Insurance Tax. The employee portion of the Medicare Health Insurance Tax (“HI Tax”) is increased by 0.9 percent on wages. The additional HI Tax starts at $250,000 in the case of a joint return, $125,000 in the case of a married person filing a separate return and $200,000 for single persons. Although this additional tax is on the combined wages of a dual working couple, an employer is only obligated to withhold the additional 0.9 percent on wages if the employee’s wages are over $200,000. Dual working couples with combined wages in excess of $250,000 should consider whether their employers are withholding enough HI Tax from their wages. If not, they will be required to pay the deficiency with their 2014 federal income tax returns.
The same additional 0.9 percent HI Tax applies to the health insurance portion of the Self-Employment Contributions Act Tax on self employment income over the threshold amounts of $250,000 in the case of a joint return, $125,000 in the case of a married person filing a separate return and $200,000 for single persons. But, unlike other self-employment taxes, the taxpayer is not allowed any deduction for the additional HI Tax.
3.8 percent Medicare Tax. Beginning on January 1, 2013, there is a new unearned income tax on individuals, estates and trusts. For individuals, the tax is 3.8 percent of the lower of “net investment income” or the excess of modified adjusted gross income over the threshold amount. In order to be subject to this tax, you must have modified adjusted gross income over of $250,000 in the case of married persons filing joint return, $125,000 in the case of a married person filing a separate return and $200,000 for single persons
Investment income that may be subject to this tax includes income like capital gains, interest, dividends, annuities, royalties and rents. Income from IRAs, Roth IRAs and most retirement plans are not subject to the 3.8 percent Medicare Tax. Deductions that are properly allocable to net investment income reduce the amount subject to this tax.
Increased Tax Rates. Married persons with income over $450,000 will be subject to a 39.6 percent federal income tax rate. Single persons will pay federal income tax at the 39.6 percent rate on income over $400,000. In addition, married persons with income over $450,000 and single persons with income over $400,000 will pay a 20 percent rate on long-term capital gain income and qualified dividend income.
Reinstatement of Personal Exemption Phaseouts and Limitations on Itemized Deductions. In addition to new taxes and increased tax rates on people with “high earnings,” higher income taxpayers may feel the tax pinch of their personal exemptions being phased out and their itemized deductions being limited. For tax years beginning after December 31, 2012, the so-called “Pease” limitations on itemized deductions were reinstated for taxpayers with adjusted gross income or AGI (as adjusted for inflation after 2013) in excess of $300,000 for married persons filing jointly and surviving spouses, $275,000 for persons filing head of household, $250,000 for individual filers and $150,000 for married persons filing separately. In effect, the total amount of itemized deductions allowed is reduced by 3 cents (in 2013) for every dollar of AGI in excess of these threshold amounts. However, a taxpayer cannot lose more than 80 percent of his or her deductions as a result of these limitations.
You may wish to take a second look at the taxes being withheld from your wages and your estimated tax payments. Like the squirrel preparing for a cold winter, now is a good time to plan ahead for taxes that come due on April 15, 2014.