Mid-year Tax Update
With all the Federal and Minnesota tax law changes, now is a good time to revisit your planning and avoid year-end surprises. Here is an overview of some of the changes for 2013:
Net Investment Income Tax (also known as the Medicare contribution tax): We have heard about this tax for a couple years now, and it is finally effective. This tax applies to taxpayers with modified adjusted gross income (MAGI) that exceeds $200,000 for single filers, or $250,000 for married filers. The tax is calculated as 3.8% of the lesser of either your net investment income, or the amount your MAGI exceeds the threshold. Proposed IRS Regulations have given some guidance on what is included in net investment income; in general, it includes interest, dividends, annuities, royalties, rents, income from passive activities, and net capital gains that are not part of a trade or business. If you generally have a fair amount of investment income, you may want to take a closer look at your projected income to see if some additional tax planning would be beneficial.
Additional Medicare tax for high-wage individuals & self-employment income: For wage earners and those with self-employment income, once you have $200,000 of wages and/or earned income, you are subject to an additional tax of 0.9% of the amount over $200,000. If you are married and file a joint return, once you and your spouse combined have over $250,000 of wages and/or earned income, this tax applies. If you receive wages, your employer will only withhold this tax for you if individually you reach the threshold. If you are married and exceed the threshold when combined with your spouse, you will be responsible for paying the tax when you file the return. For people with self-employment income, you will need to account for this in your estimates or when you file your return, depending on how you are determining your estimated payments. Be sure to consider the combined wages and earned income and plan ahead for this additional tax.
Self-employment taxes: At the end of 2012, the 2% payroll tax cut expired. If you are an employee, your employer adjusted your withholdings to account for this change. If you are self-employed, you need to be prepared for this. If your estimated tax payments are based on your prior year liability, you likely won’t have this increase of 2% built into your estimated payments. While this can be good cash flow planning, the additional tax will be due when you file your return in April, so be sure to plan for this additional tax expense.
Minnesota individual tax law changes: For Minnesota taxpayers, we now have some significant changes to the tax law. One of the biggest changes is a new top bracket for the individual income tax rates for tax years beginning after December 31, 2012. The new bracket of 9.85% will apply for single taxpayers whose income exceeds $150,000, and married taxpayers whose income exceeds $250,000. In addition, the individual alternative minimum tax rate increased from 6.4% to 6.75%. If you have based your estimated payments on a projected income amount for 2013, you should revisit the payment amounts to ensure you are paying enough in estimates. You have until September 15th to adjust your estimates to account for this increase in tax.
Minnesota business tax law changes: Minnesota businesses will also have a change to their tax liability as the thresholds and amounts of the minimum fee calculation have changed. The maximum minimum fee was raised from $5,000 to $9,340. The lower minimum fee amounts have also changed, however depending on the activity in MN, you could see the tax increasing or decreasing. If the business paid estimates based on the prior year, it should be protected from penalties; however the business may have a balance due when it files its return next spring.
Please contact Copeland Buhl if you would like any assistance with your tax planning for 2013. We would be happy to help you navigate through these changes and discuss potential planning opportunities that may be beneficial for you.