Here is a quick summary of the tax changes made effective at the beginning of the year:
- The two percentage point reduction in Social Security payroll tax was discontinued. This will probably have the widest impact as this will apply to everyone who is working.
- The exemption level for the alternative minimum tax has been made permanent and will be adjusted upward with inflation over time. Congress over the past few years would “patch” these exemptions at the last moment prior to year end.
- For those who earn over $200,000 if they are single and $250,000 if they are married will be subject to the 3.8 percent Medicare surtax on unearned income.
- Individuals with adjusted gross income of more than $250,000 and married couples with over $300,000 will be subject to phase-outs of itemized deductions and personal exemptions. This is entirely phased out at $372,501 for individuals and $422,501 for married couples.
- Individuals with taxable income of over $400,000 and married couples with over $450,000 will be subject to the highest new tax rate established of 39.6 percent. Long-term capital gains and qualified dividends will be taxed at 20 percent instead of 15 percent (add Medicare surcharge taxes and this increases to 23.8 percent).
- The $5 million estate and gift tax exemption has been made permanent ($10 million in total per couple), but the tax rate increases for amounts above the exemption from 35 percent to 40 percent.
There are some other smaller items that can be discussed at a later time, but these are the core changes. The biggest takeaways from this are individuals close to either the $200,000 or $400,000 threshold and couples close to the $250,000 or $450,000 level will want to intensify their tax planning to see if they can avoid these tax increases. Of course any strategies should be aligned with one’s goals, not for the sake of letting the tax tail wag the dog. The good news is that these tax codes are permanent in nature, which will help people plan for the long term without worrying about sunset clauses. The permanence of the alternative minimum tax exemption and estate tax code also takes away a great deal of uncertainty.
In the end, our tax code is still too complex and should be reformed. Although there is a sense of permanency here, keep in mind that this can easily change when the next presidential administration takes over in 2017.
Jeff Bogue is an independent, fee-only financial planner with his firm, Bogue Asset Management LLC, serving individuals, families and small business owners nationwide since 1997 with offices in Wells and Portland, Maine. Jeff has been a Certified Financial Planning Practitioner since 1997 and has been quoted on personal financial matters in the Wall Street Journal, Consumer Reports, Consumer Reports Money Advisor, Kiplinger’s Personal Finance, Businessweek.com, Bankrate.com The Portland Press Herald, AARP Magazine, Registered Rep.com, Fidelity Stages Magazine, AOL Money & Finance, MSN/CNBC.com, Investment Advisor Magazine, Financial Planning Magazine and Financial Advisor Magazine. He is an active member of the National Association of Personal Financial Advisors, the Financial Planning Association and the Maine Estate Planning Council.