In 2013, potentially painful changes in federal tax and benefit rules are scheduled to take place. All taxpayers stand to be affected, and the window for 2013 planning is closing fast. So take time now to get your financial house in order for next year.
Bush Era Tax Cuts
Bush-era tax cuts are set to expire at the end of this year. While the media attention surrounding these cuts has involved wealthy taxpayers, in fact all taxpayers will see higher taxes. The current lowest tax bracket rate of 10% will disappear altogether, and the new bottom bracket will be 15%.
People in the 25%, 28% and 33% brackets will see their top marginal tax rates boosted by 3 percentage points, to 28%, 31% and 36%. And the top tax bracket of 35% will be replaced by a 39.6% bracket.
Federal Spending Cuts
Automatic federal spending cuts of about $100 billion a year are scheduled to begin in 2013. In addition, Social Security payroll taxes which have been reduced from 6.2% to 4.2% of covered wages for the past two years, are set to expire. Extended jobless benefits are also set to expire.
Estate and Gift Taxes
Wealthy folks can pass on estates of up to $5.12 million. Of course, they have to die to "enjoy" this benefit. This estate ceiling also applies to a person's lifetime exemption from gift taxes (This exemption excludes the $13,000 gift exemption allowed for individual gifts each year). The estate and gift exemptions are set to drop to $1 million in 2013, and the tax rate on transfers above the ceiling will rise to 55% from 35%.
Medicare and Unreimbursed Medical Expenses
Individuals earning more than $200,000 in wages next year ($250,000 for couples) will see their Medicare payroll tax on amounts above these levels rise to 2.35% from 1.45%. They will also pay a 3.8% tax on net investment income. Taxpayers who itemize will only be able to deduct unreimbursed medical expenses exceeding 10% of their taxable incomes, up from 7.5% now. This higher threshold will not apply to taxpayers 65 and older until 2017.
Health care reform has triggered major changes in Medicare Advantage and prescription drug plans. Don't assume you should keep your current plan, even if it was the best one for you this year. Look carefully at all competing plans. Find out more on the Medicare website.