Did you know that individuals with no change in their income from last year could potentially owe the IRS because of tax law changes that went into effect in 2013? Do you know if you’re going to be one of those individuals?
The modified adjusted gross income (MAGI) threshold for paying the new 3.8% Medicare surtax on net investment income is $250,000 for joint filers and $200,000 for single filers. In addition, a tax of 0.9% on earned income (including self-employment earnings) kicks in at the same threshold as the surtax on investment profits. When adjusted gross income exceeds $300,000 for joint filers or $250,000 for single filers, phase-outs curtail personal exemptions and certain itemized deductions.
If you were in the top ordinary income tax bracket last year at 35%, your tax rate has been increased to 39.6%. This rate applies to joint filers with taxable income exceeding $450,000, or $400,000 for single filers. Tax payers in the highest bracket will also pay 5% more this year on their long-term capital gains and qualified dividends – 20% instead of 15%.
Below are a few examples given from a financial planning publication I read each month:
“Workers with high salaries are particularly vulnerable to under-withholding of the 0.9% additional Medicare tax on earned income, especially if they changed jobs midyear or have working spouses. To illustrate, take a single taxpayer who earns $175,000 from each of two employers. With earned income of $350,000, minus the $200,000 threshold for single filers, he’ll owe additional Medicare tax on $150,000. Yet employers don’t withhold the tax until a worker’s wages reach $200,000. So none of this tricky little tax will be taken out of the client’s paycheck by either employer.
Now consider a married couple, with one spouse earning $175,000 and the other $300,000. Their joint earned income of $475,000, minus the $250,000 threshold for taxing joint filers, leaves $225,000 subject to additional Medicare tax. But the first spouse won’t have any of the tax withheld, and the second spouse’s employer will only withhold on $100,000 (a $300,000 salary, minus a $200,000 threshold for withholding).”
(Source: Financial Advisor Magazine, October 2013, “Shock and Awe”)
With the 4th quarter upon us, now is a good time to update your 2013 income projections, estimate your federal tax liability, and compare it with your withholding and estimated taxes. A good tool to use for this planning can be found on the IRS website at http://www.irs.gov/Individuals/IRS-Withholding-Calculator.
If you find that you’re going to be taxed more than you originally thought, you still have time this year to boost your tax withholding at work for the remainder of the year, or you can make an estimated tax payment.
I have blocked out time in my schedule for the next month to meet with prospective clients about their year-end tax planning. If you would like to review your current tax strategy, please contact me at 913.402.6099 or firstname.lastname@example.org to schedule your free consultation.
John P. Chladek, MBA, CFP® is the President of Chladek Wealth Management, LLC, a fee-only financial planning and investment management firm specializing in helping families and couples who are not yet retired realize their financial goals. For more information, visit https://www.chladekwealth.com.
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