Now that the 2012 tax season is thankfully behind us, it's time to look towards 2013 and prepare for some of the tax land mines that Congress and the Internal Revenue Service have carefully placed before us. The American Taxpayer Relief Act of 2013, in typical Congressional fashion, fails to live up to its namesake because it provides no real relief to taxpayers due to the numerous "gotchas" buried into the code. There are several traps set for hard-working Americans and businesses; here are the top four to be aware of in 2013:
1. The Success Tax
Successful individuals and small businesses are subject to a higher income tax rate in 2013, what I term a "Success Tax." Single filers making more than $400,000 a year will be at the highest income tax bracket, 39.6 percent, while it takes a married couple making more than $450,000 a year. From a tax planning perspective, successful unmarried couples making less than $400,000 each would pay less income tax if they remain unmarried. This "marriage penalty" can be substantial for doctors, scientists, small business owners, or other higher income professionals. And while it may be painful to give nearly 40 percent to the federal government, the truth is that the "Success Tax" rate is even higher when you add in the next stealthy tax trap.
2. The Stealthy Surtax
In 2013, with the addition of the Obamacare surtax, you may be paying even more once you pass a certain income threshold. Individuals with incomes above $200,000 a year and married couples making above $250,000 will be paying another 3.8 percent to the federal government. So, if you fall within the highest income brackets (39.6 percent) you will also pay the Obamacare surtax (3.8 percent) leaving you with a federal tax bracket of 43.4 percent. If you think that's sneaky, the truth about the capital gains rate may really make you boil over.
3. The Capital Gains Lie
While the 20 percent long-term capital gains rate is what's stated under the law, it's near impossible for anyone to actually pay a 20 percent rate on long-term capital gains or dividends. The top capital gains rate is actually 23.8 percent (gain, because of the stealthy 3.8 percent Obamacare surtax) for those who supposedly face the 20 percent gains rate. In addition, if you're subject to the 15 percent capital gains rate, your true rate is 18.8 percent for the same reason even though you won't find that rate published in the law either. Agree with it or not, a lot of our tax code is built around incentives. Deductions or credits for energy exploration, home purchases, education, charitable giving, professional service fees, etc. These incentives are designed to encourage consumer spending and economic growth, but the foundation for these benefits is quickly eroding under the latest legislation.
4. The Itemized Deduction Reduction
Successful taxpayers will again be targeted by receiving reduced deduction benefits afforded to other taxpayers. You'll find yourself within the crosshairs if you're single making $250,000 or more, or married making $300,000 or more. For each $2,500 of adjusted gross income over these thresholds, your personal exemptions are reduced by 2 percent, effectively increasing, yet again, your total effective tax rate. In total, you can lose up to 80 percent of your itemized deductions!
Robert Russell is CEO & CIO of the Ohio-based Russell & Company, a private wealth management firm specializing in helping affluent individuals ages 45 and up create and preserve their wealth. He co-hosts a radio show, authors The Rob Report blog, and is a frequent contributor to The Wall Street Journal, SmartMoney, & FOX Business.
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