College for Financial Plannign 2013 Annual Limits

As a financial advisor I see clients struggling with the decision to save for their child’s college expenses and/or their own retirement.  The Wall Street Journal Experts answer the question “What’s the biggest mistake you see people make when it comes to financing their kids’ college education?” here.  Do you need direction with your own situation?  Contact Us.

What is the best way to spend your tax refund to provide the biggest benefit?  Create a plan and spend it wisely.  Consider your refund one of your paychecks, not a special “gift” from the government .  What should you do with your refund once it’s in your hands?  Here are 3 suggestions that will help you get ahead with your finances:

Increase (or Jump Start) Your Emergency Fund

Deposit it into your emergency fund.  If you don’t have have an emergency fund, now’s the perfect time to get started.  As a general rule strive to save at least six months of living expenses in an interest-bearing savings or money market account.  This will help protect you and your family in the event of a disability, job change or other unforeseen event.

Pay Down Debt

Take this opportunity to pay down or pay off credit card balances, car loans or student loans.  Start by paying down loans with the highest interest rate first.  Clearing debt at the beginning of the year is a great accomplishment and sets you up to apply those ear-marked debt payments to savings for the rest of the year.

Save for Retirement

If your emergency savings account is already funded and your debt is paid off, consider making a contribution to a traditional IRA or Roth IRA account.  It’s never too soon to start saving for retirement.  Consult with your tax preparer or financial advisor to determine which IRA account is right for you based on your age, income level and goals.

Remember that a tax refund is a result of your employer withholding too much taxes during the year.  This is actually your money the government is using instead of you.  If you receive a large refund consider adjusting your federal (and possibly state) withholding amounts with your employer to decrease your withholding and increase your net paychecks.   Do you need help determining the best way to spend your tax refund?  Contact us today to discuss your specific situation and plan for what matters.

Beginning in 2013 the new 3.8% Medicare Tax will apply to certain individuals, estates and trusts.  The new tax will apply to “net investment income” which includes:  capital gains, interest, dividends, and other gross income from trades or businesses that are passive activities.   Note that gross income from active activities, tax-exempt income and distributions from retirement plans* are excluded from this tax.

For individuals, the additional 3.8% tax applies to the lesser of:

• Net invesment income -OR-
• Modified Adjusted Gross Income (AGI) in excess of $250,000 if married filing jointly or $200,000 if unmarried

For trusts, the tax applies to the lesser of:

• Undistibuted net investment income -OR-
• Adjusted Gross Income (AGI) in excess of $11,950

*NOTE:  Even though the 3.8% Medicare Tax does not apply to retirement plan distributions, it’s possible that the distributions may increase your AGI enough to subject you to the 3.8% Medicare Tax on your net investment income.  If you are retired and taking distributions from your portfolio, we can help you determine the most tax-efficient way to use your portfolio.  Contact Us to learn more.

What are the new long-term capital gain rates (and “qualified dividend) rates in 2013?  The 0% and 15% rates remain in place for taxpayers not exceeding the following thresholds:

• $450,000 if married filing jointly
• $400,000 if unmarried
• $11,950 for estates & trusts

For those exceeding these thresholds the long-term capital gain rate is now increased to 20%.  Note that “qualified” dividend tax rates continue to be taxed at long-term capital gain rates, and therefore, follow these same rules.  But there’s more…a future post will explain the new 3.8% Medicare tax.

For most of us the individual income tax rates will stay the same.  The 10%, 15%, 25%, 28%, 33% and 35% tax brackets were made permanent.  However, a 39.6% tax bracket was added for those taxable income levels above:  $400,000 if single, $450,000 if married filing jointly, $425,000 if filing as head of household and $225,000 if married filing separate.  Fiduciary (estates and trusts) taxpayers reach the 39.6% bracket at just $11,950.  Click here to learn more about how Direction Financial Management can help you navigate through these changes.

The College for Financial Planning has posted the 2013 figures relating to tax rates, retirement plan contribution limits, Medicare premiums, Social Security limits, education credit eligibility and more.  Check out the details here.  If you need help determining how these changes relate to you Contact Us.

What is the new Medicare tax?  Historically the Medicare payroll tax has been 2.9%. It applies only to earned income, which is wages you are paid by an employer, plus tips. You’re responsible for 1.45% of the tax, and it’s deducted automatically from your paycheck. Your employer kicks in the other 1.45%.

Under the new tax provision beginning in 2013, high-wage earners will owe an additional 0.9% on earned income above the thresholds mentioned above. So, for example, if you are an individual filer whose Modified Adjusted Gross Income (MAGI) will be $225,000 in 2013, you will pay a 1.45% Medicare tax on the first $200,000, then 2.35% (1.45% plus 0.9%) on the next $25,000. Your employer will be required to withhold the extra 0.9% once your wages pass the $200,000 threshold for individuals.

Beginning in 2013 the new 0.9% Medicare tax will be applied to wages and self-employment income in excess of $250,000 if married filing jointly and $200,000 if unmarried.  If you file quarterly estimated tax payments be sure to include this additional tax in your estimates.  Want to learn more?

You may notice your paychecks are a little smaller this month.  This is due to the expiration of the payroll tax holiday.  The Social Security component of payroll and self-employment tax increases by 2% beginning January 1st.  This means the employee’s share of payroll tax is now 6.2% instead of 4.2%.  Self-employment tax is now 12.4% instead of 10.4%.  These taxes apply to wages or self-employment income up to $113,700 (Social Security limit).