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Year-End Tax Planning: Income Tax Considerations for Individuals – Part 1 of 4

The 2013 tax filing season is upon us and individuals across the country are preparing for their annual ordeal. You, of course, will be consulting your tax professional, but here’s some useful information to have with you:

These are the Applicable Taxable Income Threshold Amounts for 2013. Income over these amounts are taxed at 39.6% for ordinary income (up from 35% in 2012), plus 20% for long term capital gains and dividends (increased from 15% in 2012).

$450,000 – Married filing jointly
$425,000 – Head of household
$400,000 – Single
$225,000 – Married filing separately

It is important to know however, that the higher tax rate applies only on the incremental income above thresholds. Taxpayers below the 39.6% marginal income tax brackets still benefit from extension of all Bush-era rates below that level.
 
The new 39.6% rate has been carved out of the current top 35% bracket.  The applicable 35% brackets are extremely condensed:

$398,350 - $450,000 – Married Filing Joint
$398,350 - $425,000 – Head of household
$398,350 - $400,000 – Single 
$199,175 - $225,000 – Married Filing Separately

With this condensed 35% bracket you can easily see how taxpayers will go from 33% to 39.6% very quickly.  Taxpayers with taxable income near these thresholds need to be sure to look at possible ways to defer income or accelerate deductions prior to year end.

Let’s take a look at two examples and ask a question:

John and Julie are married filing joint return in 2013:
Example 1: Taxable income is $400,000 - all long term capital gain. What tax rate do you think they will pay in 2013? 

Example 2: Taxable income is $500,000 - all long term capital gain. What tax rate do you think they will pay in 2013?

The answer is that if a married couple is below the $450,000 threshold, they will continue to pay tax at the 15% rate for LT gains.  BUT even when the taxpayer exceeds the $450,000 threshold, it is only the incremental amount taxed at the higher rate.  Therefore the Example 2 taxpayers with $500,000 of LT gain will only pay the increased 20% rate on $50,000 ($500,000 - $450,000)

In Part 2 we’ll take a quick look at the impact of the 3.8% Federal Medicare Contribution tax. 

Please click here to view our Year-End Tax Planning series. 

Barbara Taibi is a Partner in the Personal Wealth Advisors Group with years of public accounting and income tax planning and tax return preparation experience. Barbara focuses on helping clients plan for and meet their financial and tax goals.

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