Year-end tax planning important for upper-income households

December 29, 2013 

The American Taxpayer Relief Act, signed into law in January, has left taxes much the same for households with incomes less than $250,000. And for those with income above that, the tax landscape is clear, too: They will owe Uncle Sam more.

For taxpayers, here are some changes to be aware of for the 2013 tax season, as well as some moves to consider that might reduce how much you owe:

THE RETURN OF HIGHER RATES: The lower tax rates on regular income introduced during the Bush administration remain intact. But the wealthy will see the return of the top tax rate of 39.6 percent, which had disappeared for years. This rate applies to taxable income above $400,000 for singles and $450,000 for married joint filers.

Most people don’t fall into this category. But those who do might want to consider shifting more toward nontaxable income, such as tax-exempt bonds, said Mark Luscombe, principal analyst with CCH, an Illinois-based provider of tax information.

Or, if self-employed, taxpayers can try to get below those $400,000 and $450,000 limits by postponing income into next year, such as sending bills to customers early next year, Luscombe said.

Taxpayers in these income thresholds also will see the rate on long-term capital gains go up from 15 percent to 20 percent.

TAXES TO SUPPORT HEALTH REFORM: The well-to-do will be kicking in more under two new taxes that were part of the Affordable Care Act, better known as Obamacare. Workers already pay 1.45 percent of wages for Medicare. But high earners this year started paying an additional 0.9 percent on wages exceeding $200,000 for singles and $250,000 for joint filers. Taxpayers at those income levels also will be subject to a new 3.8 percent tax on net investment income, which includes dividends, royalties, rents and capital gains.

KEEP INCOME LOW: If possible, taxpayers should try to keep their income below the $200,000 or $250,000 threshold to lessen the tax impact. They can contribute more pre-tax dollars to a retirement plan. Or, instead of converting an entire traditional IRA to a Roth IRA — in which the amount converted is considered income for tax purposes — taxpayers should convert smaller sums over a few years to keep below the threshold, Luscombe said.

Eileen Ambrose writes for The Baltimore Sun

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