tax changes

2013 Tax Law Changes: Watch Out for These Hits

Some of the 2013 tax law changes slated to take effect Jan. 1 could hit your portfolio if you aren't prepared - and some will go into effect regardless of the fiscal cliff resolution.

In fact, the Internal Revenue Service (IRS) has released 159 pages of rules that will apply to trusts, annuities and individual equity traders.

One tax that could affect you is a new 3.8% surtax on investment income - or as it's fondly called, the investment income Medicare tax. The new tax is part of the 2010 healthcare reform law passed by Congress, and represents the first surtax on capital gains and dividend income.

There's also a new 0.9% healthcare tax on wages for high-income individuals; it is called the earned income Medicare tax increase.

Combined, these two taxes could raise an estimated $317.7 billion over the next decade, reported Reuters, based on a June Joint Committee on Taxation analysis.

To find out if you qualify for these taxes - and how to avoid them - check out this look at the proposed changes.

2013 Tax Law Changes: Medicare Surtax

The 3.8% Medicare surtax is a big deal because it's the first time a Medicare tax will be assessed on investment income.

For the purposes of the rule, investment income includes the following:

  • Interest, Dividends, Royalties, and Annuities
  • Capital gains, including any profit you make on the sale of your residence if it exceeds the amount you are allowed to exclude
  • Passive-activity income. This can defined as earnings that stem from rental property, limited partnerships or other business that an individual is not actively involved.
You'll be affected by the Medicare surtax if your modified adjusted gross income (MAGI) is more than $200,000 as an individual, or $250,000 for married couples filing jointly.

Your MAGI is the total of adjusted gross income plus any foreign income. So if you work in the United States, MAGI will equal AGI, which includes your net investment income (gains minus losses).

It's a bit tricky, though.

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The 2013 Tax Law Changes that Could Be Headed Your Way

There are a slew of 2013 tax law changes ready to go into effect if Congress fails to reach an agreement on the fiscal cliff.

According to the Tax Policy Center, almost 90% of taxpayers, both rich and poor, will see their household tax bill increase by about $2,000 next year with the top 1% seeing a tax increase on average at $121,000.

In other words, take-home pay will decrease, which has been referred to as "Taxmageddon,"with the middle class especially hard hit from the changes.

But that's just a small piece of the large puzzle of 2013 tax law changes. Here's a more detailed look at what could hit your income, investments and savings.



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Taxmageddon 2013: These Filers Are in the Crosshairs

As Taxmageddon 2013 looms against the back drop of Election 2012 one thing is for certain: upper-income filers will take a hit in 2013 even if no new taxes are imposed, as will owners of some small businesses.

In Part One of our series on the tax outlook for 2013, we described how scheduled tax-law changes will affect capital gains - boosting taxes on long-term profits from 15% to 23.8% for some taxpayers. And, in Part Two, which ran last Thursday, we explained that dividend investors could suffer even more, with some seeing their tax bite rise from the current 15% to as much as 43.4%.

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Taxmageddon 2013: How to Prepare for Looming Tax Law Changes

It's often said the only things certain in life are death and taxes - but this year, even taxes aren't a certainty.

At least not the specifics, thanks to Election 2012 and Taxmageddon 2013. Investors are left with more questions than answers.

Will the so-called Bush tax cuts expire as scheduled - or be extended? Will levies designed to help implement and pay for Obamacare go into effect - or will Republicans finally succeed in repealing the new healthcare program?

Will President Barack Obama view his re-election as a mandate to impose more new taxes to expand social programs, or will a newly-elected President Mitt Romney cut taxes in a bid to encourage renewed economic growth?

That's why it's important for investors to look at the range of possibilities relative to their current financial holdings and take precautionary actions where appropriate.

This special Money Morning series will examine a number of upcoming or proposed changes in tax laws and rates and suggest strategies to minimize their impact on your investments. Or better yet, take advantage of them if possible.

With Taxmageddon, Rates are Set to Rise

As it stands, there are more than two dozen tax-law changes scheduled to take effect in 2013. Some of them target nearly every single taxpayer while others are more narrowly focused on individuals, such as small business stockholders and home sellers.

Of most immediate concern to investors is the scheduled increase in tax rates on capital gains. Currently, the federal government recognizes three types of capital gains:

  • Short-term gains - Profits from assets held for less than one full year. These gains are taxed as ordinary income at a rate based on your total personal income, with percentages now ranging from 10% to 35%.
  • Ordinary long-term gains - Profits from assets held for more than one year, now taxed at a maximum rate of 15%, regardless of income from other sources. (Note: Individual taxpayers in the 10% and 15% brackets now pay no tax on long-term capital gains but merely include them with other taxable income. However, in 2013 these taxpayers will be subject to a 10% tax on long-term gains.)
  • Qualified long-term gains - Profits from assets purchased after the 2000 tax year and held for a minimum of five years. Qualified gains are currently taxed at a maximum 15% rate.


This relatively simple structure will become more complicated in 2013, for several reasons...

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