5 Things You Need To Know About The New Tax Laws
When I was twenty years old in college, I calculated that the biggest lifetime expense I’ll have is not a mortgage or my college education but it is income taxes. From then on, I read everything I could about the tax code and how to get the most after-tax mileage out of every dollar I earn and save. The new tax law is the “American Tax Relief Act of 2012”. Essentially, the new act extends many of the tax breaks we have been using for years.
1. There are new income thresholds for ‘high income earners’. High income earners are joint filers whose taxable income is $450,000. These earners have a new tax rate of 39.6% and a top long-term capital gain and dividend tax rate of 20%. Our tax brackets are actually a tiered system, which means that only the amount of money above $450,000 is taxed at the new rate.
2. Joint filers with modified adjust gross income (magi) over $250,000 will begin to have their net investment income hit with an additional 3.8% Medicare surtax.
3. The alternative minimum tax (AMT) patch is now permanent, with the income threshold being linked to inflation. This is a huge relief to the hundreds of thousands of tax payers that would have been hit with AMT.
4. For estate taxes, there is now a permanent $5M exemption adjusted for inflation each year. So many will not be hit with estate taxes, but there is still the concern for state estate taxes. The annual gift tax exclusion is now $14,000.
5. For retirement plans the 2013 elective deferral to your 401(k) went up to $17,500, with a catch-up of $5,500. The IRA contribution limit increased to $5,500, with $1,000 catch-up. So if you’re 50 or older, you can stash away as much as $29,500 of tax-deferred savings.
When looking at your tax planning strategies such as which assets to hold in your tax-sheltered accounts, carefully analyze any tax impacts. The more you make, the more Uncle Sam will want to take.