It’s the start of a new year, and the next few months mean a lot of long hours for us.  Tax season 2014 has officially started… 

As you prepare your taxes this year, or if you have your tax returns prepared by someone, you may notice a couple of tax changes that took effect in 2013.  And they could take you by surprise if you are not prepared.

Many people will not notice the changes, but there are many people who will:

1.  New 39.6% tax bracket – in 2013, there is a new top tax bracket of 39.6% if you are single and make more than $400,000, or married and make more than $450,000

2.  New 0.9% Medicare tax – this new tax is applicable to your wages and kicks in if you earn more than $200,000 if you are single and $250,000 if you are married

3.  New 3.8% Medicare tax – this is an additional tax on “unearned” investment income (dividends, interest, capital gains) if you are earn more than $200,000 if you are single and $250,000 if you are married

4.  Increased capital gains rate – capital gains rates are staying at 15% for most people, but single filers that earn over $400,000 and married filers earning over $450,000 will now pay 20%

5.  Reduced exemptions and itemized deductions – while technically not a tax rate increase, I like to call these “stealth” taxes.  Basically, instead of raising rates, Congress effectively raises rates by reducing your deductions.  Personal exemptions begin to phase out (go away) if you earn more than $250,000 for single filers and $300,000 for married filers.  The same happens to itemized deductions if you earn more than those same amounts.

Because of these changes, high income taxpayers can pay upwards of 50% of their income in tax for 2013!!

While it’s generally too late to plan for 2013, we advise to have your tax return prepared early in 2014 to see the impact and plan accordingly.

Mat Hultquist, CPA