Finished 2012 taxes? Plan for '13.
Before you close the books on 2012, spend a few minutes thinking about taxes for 2013. High-income taxpayers in particular will have to plan to ease tax bite.
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Then there's the Medicare payroll tax, which charges an extra 0.9 percent on wage income above the $200,000/$250,000 thresholds. These two taxes combine in different ways, as shown in this example from Fidelity Investments:Skip to next paragraph
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If Paul and Ann make $330,000 in wages and $42,000 from their investments, their modified AGI is $372,000. That puts them $122,000 over the $250,000 threshold for the Medicare surcharge for married couples filing jointly. But because their investment income ($42,000) is less than that, they'll only owe 3.8 percent on $42,000, or $1,596. They'll also owe an extra 0.9 percent – the Medicare payroll tax – on wage income above $250,000. In this case, that works out to $80,000, triggering a tax of $720.
Couples wanting to reduce that $2,300 tax bite will have to come up with a tax strategy.
"There are quite a few things that have to be done for people in that category," says Rick Rodgers, a certified financial planner in Lancaster, Pa., and author of "The New Three-Legged Stool: A Tax-Efficient Approach to Retirement Planning." The strategy will depend on the level of a taxpayer's wage and investment income.
If the priority is reducing wage income, taxpayers should try to time when they receive income and bonuses and when they make charitable contributions, says Tim Barry, a tax principal at BlumShapiro, a regional accounting firm based in West Hartford, Conn. If the strategy is to reduce investment income, then taxpayers may want to engage in tax-loss harvesting (balancing out investment gains by selling other investments at a loss).
High-income Americans will take other hits in 2013. While the capital gains tax rate stays the same for low- and middle-income earners (0 and 15 percent, respectively), it jumps to 20 percent for individuals earning more than $400,000 ($450,000 for married filing jointly).
Another wrinkle: Deductions are phased out as income increases. The personal exemption generally allows taxpayers to reduce their taxable income by $3,900 for themselves, another $3,900 for a spouse, if applicable, and for each dependent child. But starting with individuals earning $250,000 ($300,000 for married filing jointly), the exemption begins to phase out. It disappears completely for couples earning $422,500. Those taxpayers also face reductions in popular itemized deductions, such as for mortgage interest and property taxes, although they never disappear completely.
The new code could well change how high-income taxpayers invest, says Mr. Barry of BlumShapiro. Municipal bonds may become much more popular among the wealthy because their tax-exempt income can help reduce the bite from federal taxes.