As tax-filing season gets into full swing, there are many details to remember. One subject to keep in mind — especially if you’ve seen your income rise recently — is whether you’ll be able to reap the full value of tax breaks that you’ve claimed previously. (more…)
Posts tagged ‘adjusted gross income’
As the calendar approaches the end of 2015, it is helpful to think about ways to shift income and deductions into the following year. For example, spikes in income from selling investments or other property may push a taxpayer into a higher income tax bracket for 2015, including a top bracket of 39.6 percent for ordinary income and short-term capital gains, and a top bracket of 20 percent for dividends and long-term capital gains. (more…)
Higher-income individuals whose adjusted gross income (AGI) exceeds specified thresholds must reduce their itemized deductions that are otherwise allowed on their return. This reduction in itemized deductions did not apply to tax years 2010-2012, but has been reinstated, beginning in 2013. The provision does not apply to estates and trusts.
Under the Pease limitation (named for the Congressman who developed it), itemized deductions are reduced by the lesser of:
- Three percent of the taxpayer’s AGI in excess of the applicable threshold, or
- 80 percent of the itemized deductions otherwise allowable.
The thresholds increase for inflation every year. The thresholds for the 2014 tax year are:
- $305,050 for married taxpayers filing joint returns and surviving spouses;
- $279,650 for heads of household;
- $254,200 for other single taxpayers; and
- $152,525 for married filing separately.
The respective inflation-adjusted thresholds for 2015 are projected to be: $309,900; $284,050; $258,250; and $154,950.
In calculating the reduction, other limitations are applied first, such as the two percent floor for miscellaneous itemized deductions and the floor for medical expenses. However, the term “itemized deductions” does not include deductions for medical expenses, investment interest, casualty or theft loss, and allowable wagering losses. Thus, these latter amounts are not subject to the reduction.
Example. For 2014, married taxpayers report AGI of $355,050, or $50,000 over the applicable threshold of $300,000. They have itemized deductions of $15,000 for taxes and charitable contributions, plus $2,000 in medical expenses, for a total of $17,000. The first reduction (based on three percent of excess AGI) is ($355,050 – $305,050) x .03, or $1,500. The alternative reduction (80 percent cap) is .80 x $15,000 (medical expenses excluded), or $12,000. Since the lesser amount is $1,500, allowable itemized deductions are reduced from $17,000 to $15,500.
Newly released data from the IRS reveals an increase in adjusted gross incomes, the number of taxpayers paying alternative minimum tax (AMT) and more. The data, posted in the Spring 2014 Statistics of Income Bulletin, comes from 2011, the most recent year for which statistics are available, the IRS reported.
Approximately 145 million individual income tax returns were filed in 2011. Overall, adjusted gross income for all taxable returns was $7.7 trillion, reflecting an increase of approximately six percent from 2010. The IRS reported that the top one percent of returns had an adjusted gross incomes of $388,900 or more and accounted for 18.7 percent of total adjusted gross income for 2011. Total income tax paid for 2011 exceeded $1 trillion.
Taxpayers claimed $73.6 billion in tax credits in 2011. This represented a decrease of 35.2 percent from the $113.6 billion of credits claimed in 2010, due to the expiration of the Making Work Pay Credit, the IRS explained. The IRS also reported an increase in noncash contributions to charitable organizations. More than 22 million taxpayers reported a total of $43.6 billion in deductions for noncash charitable contributions.
For 2011, the IRS reported that AMT liability increased 11 percent to $30.5 billion from $27.5 billion in 2010. The number of returns paying AMT increased by 0.2 million. Alternative minimum taxable income (AMTI) for all returns filing Form 6251 increased 12.6 percent to $2.3 trillion from 2010. Since 2001, the number of returns paying AMT more than tripled from 1.1 million to 4.2 million for 2011, the IRS reported.
As required by the Tax Reform Act of 1976, the IRS reported statistics relating to that the number of 2011 returns with expanded-income over $200,000. Expanded income is AGI plus many deductions, credits, and exclusions that would not otherwise be factored into AGI, such as tax-exempt interest, nontaxable Social Security benefits, foreign-earned income exclusion, and certain miscellaneous itemized deductions. The number of expanded-income returns increased by 9.4 percent to 4.8 million for 2011.
The IRS Statistics of Income (SOI) Division has released statistics on 2011 Individual Income Tax ZIP Code and County Data, which is broken down by income categories within particular zip codes. The statistics-which are the most recent from the IRS-were based on records of the 2011 Forms 1040, U.S. Individual Income Tax, filed from January 1, 2012 to December 31, 2012. They provide data on selected types on income, total returns claiming itemized deductions and types and amounts of deductions claimed.
Zip code data is one of the factors used by the IRS’s computerized Individual Masterfile (IMF) tax return processing system to select returns for audit. A return might appear suspect if, for example, a taxpayer’s income seems low or itemized deductions too high when compared to the average income and deductions of other households in the same zip code.
The states with the highest percentage of total tax filers reporting $200,000 or more in adjusted gross income for 2011 include: California (4.31 percent of all filers reported more than $200,000 in AGI), Connecticut (5.89 percent), the District of Columbia (6.13 percent), Illinois (3.64 percent), Maryland (4.74 percent), Massachusetts (5.28 percent), New Jersey (3.47 percent), New York (4.23 percent), Virginia (4.47 percent), and Washington (3.57 percent).
Among the zip codes reporting the highest amount of AGI were:
- California, 90049: $5.0 billion total AGI; with a total 7,447 filers reporting income of $100,000 or more, 95 percent of whom itemized their deductions. Filers with income between $100,000 and $200,000 claimed an average amount of $40,358 in itemized deductions; Filers with income of $200,000 or more itemized an average amount of $203,901 in deductions.
- Connecticut, 06830: $6.1 billion total AGI; with a total 4,296 filers reporting income of $100,000 or more, 93 percent of whom itemized their deductions. Filers with income between $100,000 and $200,000 claimed an average amount of $35,774 in itemized deductions; Filers with income of $200,000 or more itemized an average amount of $371,812 in deductions.
- New York, 10021: $10.2 billion total AGI; with a total 10,443 filers reporting income of $100,000 or more, 99 percent of whom itemized their deductions. Filers with income between $100,000 and $200,000 claimed an average amount of $32,833 in itemized deductions; Filers with income of $200,000 or more itemized an average amount of $351,843 in deductions.
- Other localities. Other notable higher-income zip codes include: Ala. (35242); Calif. (94010); D.C. (20009, 20016); Fla. (33496); Ga. (30327); Ill. (60611); Md. (20817, 20854); Minn. (55347); N.Y. (10011; 10023); Texas (78746, 77024); Wash. (98052); and Va. (22101).
IRS 2011 Individual Income Tax ZIP Code and County Data
Many higher-income taxpayers will be in for a big surprise when they finally tally up their 2013 tax bill before April 15th. The higher amount of taxes that may be owed will be the result of the combination of several factors, the cumulative effect of which will be significant for many. These factors include a higher income tax rate, a higher capital gains rate, a new net investment income tax, and a new Medicare surcharge on earned income, as well as a significantly reduced benefit from personal exemptions and itemized deductions for those in the higher income tax brackets.
Higher top income tax rate
The American Taxpayer Relief Act of 2012 made permanent for 2013 and beyond the lower Bush-era income tax rates for all, except for taxpayers with taxable income above $400,000 ($450,000 for married taxpayers filing jointly, $425,000 for heads of households). Income above these levels has now been taxed at a 39.6 percent rate rather than at the top 35 percent rate since January 1, 2013. Those amounts are adjusted for inflation after 2013 (for 2014, those threshold levels are $432,200, $457,600, and $406,750, respectively. Taxpayers with $150,000 of income above the threshold amounts, for example, must pay an additional $6,900 in tax in 2013 because of the additional tax rate of 4.6 percent).
Capital gains and dividends
The American Taxpayer Relief Act also raised the top rate for long-term capital gains and dividends to 20 percent, up from the Bush-era maximum 15 percent rate—again, applicable to all net long-term capital gains from transactions made on or after January 1, 2013. That top rate will apply to the extent that a taxpayer’s income exceeds the thresholds set for the 39.6 percent rate ($400,000 for single filers; $450,000 for joint filers and $425,000 for heads of households). Especially applicable to those investors who have been riding the recent stock market rally, a jump in the rate from 15 percent to 20 percent represents a 33.33 percent tax increase.
Set into motion on January 1, 2013 by the Affordable Care Act of 2010, higher-income taxpayers have been required to pay an additional 3.8 percent on net investment income as well as a 0.9 percent Additional Medicare Tax on earned income.
In both cases, the income threshold levels for being subject to these new taxes are considerably lower than the 39.6 percent bracket and 20 percent capital gain rates. The threshold amount is $200,000 in the case of a single individual, head of household (with qualifying person) and qualifying widow(er) with dependent child. The threshold amount is $250,000 in the case of a married couple filing jointly and $125,000 in the case of a married couple filing separately. For the 3.8 percent net investment income tax, the threshold is adjusted gross income (modified for certain foreign-based income). For the 0.9 percent Additional Medicare Tax, the threshold is measured against compensation earned for the year (including self-employment income):
Net investment income tax. The 3.8 percent tax not only covers capital gains and dividends, but also passive-type income flowing from real estate, investments in businesses, and the like. The rules are complex, and many taxpayers will struggle with the extent to which income on their 2013 tax returns will be subject to the new net investment income tax. For income subject to this tax, the effective rate will increase to 23.8 percent on net capital gain and dividends and 43.4 percent on short-term capital gain and all other passive-type income.
Additional Medicare Tax. For tax years beginning after December 31, 2012, the 0.9 percent Additional Medicare Tax applies to employee compensation and self-employment income above the threshold amounts noted above. Covered wages for purposes of the Additional Medicare Tax include not only regular salary or payments for services rendered to someone self-employed, but also tips, commissions that are part of compensation, bonuses, reimbursements under nonaccountable plans, back pay awards, gifts by employers to employees and more.
An employer’s withholding obligation for the Additional Medicare Tax applies only to the extent the employee’s wages are in excess of $200,000 in a calendar year. For some dual-income couples with combined earned income above the $250,000 threshold but with no one earning more than $200,000, they may find themselves under withheld and subject to an estimated tax penalty as a result. Couples should remember that to prevent a reoccurrence in the future, an employee may request additional income tax withholding, which will be applied against all taxes shown on the individual’s return, including any liability for the Additional Medical Tax.
Itemized Deductions Limitation
The American Taxpayer Relief Act officially the “Pease” limitation on itemized deductions. The new thresholds, first applied in 2013, are $300,000 for married couples and surviving spouses; $275,000 for heads of households; $250,000 for unmarried taxpayers; and $150,000 for married taxpayers filing separately.
The Pease limitation reduces the total amount of a higher-income taxpayer’s otherwise allowable itemized deductions by three percent of the amount by which the taxpayer’s adjusted gross income exceeds this applicable threshold. The amount of itemized deductions may be reduced up to 80 percent under this formula. Certain items, such as medical expenses, investment interest, and casualty, theft or wagering losses, are excluded.
Personal Exemption Phaseout
The American Taxpayer Relief Act also revived the personal exemption phaseout rules, at the same levels of adjusted gross income revived for the Pease limitation. Under the phaseout, the total amount of exemptions that may be claimed by a taxpayer is reduced by two percent for each $2,500, or portion thereof (two percent for each $1,250 for married couples filing separate returns) by which the taxpayer’s adjusted gross income exceeds the applicable threshold level. At the full phase out level, therefore, a family with four personal exemptions in 2013 will lose $15,600 in exemptions, creating $6,178 in additional tax at the 39.6 percent bracket.
Federal Estate and Gift Taxes
One bright spot for higher-income taxpayers is the change that took place starting in 2013 directly applicable to estate planning strategies. The American Taxpayer Relief Act permanently provided for a maximum federal estate tax rate of 40 percent with an annual inflation-adjusted $5 million exclusion for estates of decedents dying after December 31, 2012. Couples can combine exclusions and effectively exempt $10 million from estate tax (for 2013, the inflation-adjusted level is $10.5 million, rising to $10.68 million in 2014).
If you would like a further assessment of how the new, “higher-income taxes” will impact what you owe for 2013 this coming April 15, or if you would like to start now to implement a plan to minimize these taxes in 2014, please do not hesitate to contact this office at (908) 725-4414.
Did you owe tax on your 2012 tax return? Did you receive a sizeable refund? Or, conversely, did you receive a smaller refund than you expected? If so, take another look at your tax return from this past year. It is quite possible that by making a few changes, you could put more money in your pocket in the short term. And by examining your investments as they are reported on your tax return, you may be able to strategize for the long-term future. Trying to implement this type of plan may seem difficult at first. However, just by looking at your tax return, you can start the critical planning that can lead you to broader goals of financial independence and a comfortable retirement.
If you received a large tax refund, it might be time for you to adjust the amount of tax the federal government withholds from your paycheck. Although next year your refund check may not be as large, you will have the advantage of seeing a larger sum deposited directly into your pocket every month. To adjust your withholding, fill out and sign a Form W-4, and submit it to your employer. You would want to do this in cases where your adjustments to income, exemptions, and deductions remain relatively steady from year-to-year, and where the government consistently is required to give you a large refund.
If you do not change your withholding allowances, the government essentially is holding your money for a year without paying any interest on it. You may lose some potential investment opportunity or, at the very least, the ability to increase your monthly discretionary income. On the other hand, many taxpayers prefer to receive the large refund check after tax filing season because it is a no-hassle way to ensure large savings at the end of the year.
Conversely, many taxpayers may want to change their withholding allowances because they owe the government a significant amount of money at the end of the year. Taxpayers who expect to owe at least $1,000 in tax for the 2013 tax year, after subtracting withholding and any refundable credits, and who also expect their 2013 withholding and credits to be significantly less than the projected tax owed for 2013, may need to file estimated taxes. Failure to do so could result in penalties. Alternatively, taxpayers should consider making quarterly estimated tax payments, especially if they anticipate a significant amount of investment gains for the year or other income unrelated to wage compensation.
Some people are entirely exempt from state tax, but it is withheld from their paychecks nevertheless. At the end of each year, they may include the amount of their state taxes in their itemized deductions, but then receive a refund which they have to declare as income in the next year. This problem particularly applies to active duty military families, many of whom are posted in states other than their state of residency. Military families can check with their state income tax authority to see if there is an appropriate form that can be completed and filed, which would exempt them from withholding. A higher adjusted gross income (AGI), even if it is subsequently reduced by itemized deductions, can erode other adjustments to income, such as a deduction for student loans, IRA contributions, higher education expenses, and more because of certain AGI caps on these benefits.
Tax rates and adjusted gross income
As you may have heard, Congress allowed the Bush-era tax cuts to expire for higher-income earners. That means joint filers with more than $450,000 of adjusted gross income ($400,000 for single individuals) are now in the 39.6-percent tax bracket. Taxpayers at this level of income or above are also subject to a higher long-term capital gains tax rate: 20 percent, up from 15 percent paid by other taxpayers.
In addition, for tax years beginning in 2013, the 33-percent tax bracket for individual taxpayers ends at $398,350 for married individuals filing joint returns, heads of households, and single individuals. If you were hovering near the bottom of the 35-percent bracket for the 2012 tax year, then you might want to see if you can readjust your income so that you fall within the 33-percent category.
Higher-income taxpayers also have two new taxes to worry about for 2013 and beyond. Joint-filing taxpayers with modified adjusted gross income of $250,000 ($200,000 for single filers) are also subject to the 3.8-percent surtax on net investment income and a .9-percent Additional Medicare Tax. Look at your adjusted gross income for last year. Does it approach these figures? Is it on the edge of the income brackets? Will stock market increases this year put you over the top of those income thresholds? If so, it may be time to find ways to reduce your income for 2013.
At some point in your efforts over the years to accumulate a savings nest egg, you will need to consider diversification, the process of putting your money in the right kind of investment vehicles to satisfy your personal risk strategy and achieve your goals. Looking at your tax return will help you decide whether the investments you now have are the right ones for you. For example, if you are in a high tax bracket and need to diversify away from common stocks, investing in tax-exempt bonds might help, especially if you have state income taxes to worry about, too.
Reviewing the Schedule D and Form 8949, which cover Capital Gains and Losses from last year’s return and from the past three or four years, can be an eye-opener for many. Did you hold stocks long enough to be entitled to the long-term capital gains rate? Did you try to balance short-term gains with short-term losses? Are you bouncing from one investment trend to another without a long-term investment plan that achieves long-term needs? Are your mutual funds “tax smart”? Become familiar with different types of banking institutions and their products. Find out about CDs, money-market funds, government securities, mutual funds, index funds, and sector funds and how they interrelate with the determination of your tax liability each year. You may want to put that knowledge to work in your investment strategy.
Should you be taking advantage of the medical expense deduction? Many people assume that with the 10 percent adjusted gross income floor on medical expenses now imposed for tax years starting in 2013 (7.5 percent for seniors) that it doesn’t pay for them to keep track of expenses to test whether they are entitled to itemize. But with the premiums for certain long-term care insurance contracts now counted as a medical expense, some individuals are discovering that along with other health insurance premiums, deductibles and timing of elective treatments, the medical tax deduction may be theirs for the taking.
Don’t forget to protect for eventualities. Are you maximizing the amount that Uncle Sam allows you to save tax-free for retirement? A look at your W-2 for the year, and at the retirement contribution deductions allowed in determining adjusted gross income should tell you a lot. Should your spouse set up his or her own retirement fund, too? Are you over-invested in tax-deferred retirement plans? If so, you may lose a significant amount of your nest egg to tax after retirement.
When you are reviewing last year’s tax return, it may help to review some of what you’ve learned from it. This could foster an important conversation with your tax advisor about how to establish or modify your plan for your financial future. If you would like to review last year’s completed tax return with future planning in mind, please feel free to give us a call at 908-725-4414 and set up a time when we can meet and discuss this matter.