How Will 2013 Taxes Affect You?The new tax landscape looks very different than it did in 2012. How will the tax law changes affect your situation? Here is a brief summary covering some of what you can expect.
IRA charitable rollover: Donors aged 70½ or older are once again eligible to move up to $100,000 from their IRAs directly to qualified charities without having to pay income taxes on the money. Known as the IRA charitable rollover, this law has been extended to the end of 2013 and made retroactive for 2012. Your gift will qualify under this law if:
- You made a gift of up to $100,000 from your IRA directly to a qualified charity in 2012.
- You made a gift before Feb. 1, 2013 ? you may choose for this to qualify as a 2012 or 2013 gift. (If you took a distribution from your IRA in December 2012 and then made a gift prior to Feb. 1, 2013, the law allows you to treat it as a direct transfer.)
- You make your qualified charitable distribution by Dec. 31, 2013 ? this will qualify as a 2013 gift.
Estate, gift and generation-skipping taxes: The 2013 tax law permanently preserves the current individual gift, estate and generation-skipping tax to a unified $5 million exemption. This amount is indexed for inflation each year, with the exemption for 2013 being $5.25 million. The top estate and gift tax rates will rise from 35 percent to 40 percent. The annual gift tax exclusion?the amount you can give to anyone gift tax-free each year?is now $14,000 ($28,000 for married couples).
Portability: In 2012, if one spouse died without using up his or her federal estate tax exemption, the unused portion could be transferred to the surviving spouse. This was called a portability provision. In 2013, this portability provision was made permanent. This year's combined exemption for married couples is $10.5 million.
Itemized deductions: In 2013, the Pease limitation was revived, meaning that itemized deductions, including charitable deductions, are reduced for individuals earning $250,000 or more and for married couples earning $300,000 or more. These amounts will be indexed annually for inflation. The Pease limitation does not apply to deductions for medical expenses, investment interest, casualty and theft losses, and gambling losses.
Personal exemptions: In 2013, personal exemptions are limited for individuals making $250,000 or more and for married couples making $300,000 or more.
Dividend income: Qualified dividend income will be taxed at a maximum rate of 20 percent. See below for how this percentage may be affected by the Medicare surtax.
Long-term capital gains: The capital gains tax rate ? the tax you pay on the amount an asset has increased in value over time ? will depend on a taxpayer?s ordinary income tax rate. The capital gains tax will be waived for taxpayers below the 25 percent ordinary income tax rate. For those taxpayers who fall at or above the 25 percent income tax rate but below the 39.6 percent tax rate, the capital gains tax will be 15 percent. For those at the 39.6 percent ordinary income tax rate, the capital gains tax will be 20 percent. See below for how the Medicare surtax may affect these percentages.
Medicare surtax: Beginning in 2013, there is a 3.8 percent surtax on investment-type income and gains. This applies to investment income for individuals with adjusted gross incomes above $200,000 ($250,000 for those filing jointly). This means the top rate for capital gains and dividends will be 23.8 percent if your income falls in the 39.6 percent tax bracket.
Payroll taxes: In 2013, the Social Security payroll tax will increase from 4.2 percent to 6.2 percent, meaning taxpayers will have more withheld from each paycheck.
Consult Your Tax Advisor Today
Because of the numerous changes to tax laws in 2013, everyone can expect to be affected. Consult your tax advisor on what the new tax laws will do to your bottom line and how to plan accordingly.
If you are contemplating a charitable gift under the new laws, please feel free to contact Laurie L. Dietrich '80 at 507-933-6043 or firstname.lastname@example.org with any questions you may have.