Higher Earners Will Pay More Taxes This Spring

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Higher Earners Will Pay More Taxes This Spring

Several tax hikes aimed at high-income taxpayers took effect in 2013, and now the bill is coming due.

Congress resurrected the top rate of 39.6% for taxable income over $400,000 ($450,000 for married couples) for the 2013 tax year. Taxpayers in this bracket will also pay a 20% rate on long-term capital gains and dividends, instead of the 15% most taxpayers pay. Congress also revived phaseouts of itemized deductions and personal exemptions for taxpayers with adjusted gross income of $250,000 or more, or $300,000 for married couples.

See Also: Preparing 2013 Returns Can Be Taxing

Separately, taxpayers who have a large amount of investment income could owe more because of tax provisions included in the Affordable Care Act. The ACA introduced a 3.8% surtax on unearned income, including dividends, royalties, rents and capital gains. This surtax affects single taxpayers with modified adjusted gross income of $200,000 or more, or married joint filers with MAGI of $250,000 or more. The surtax will be based on your investment income or the amount by which your MAGI (which includes investment income) exceeds the threshold, whichever is less.

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There’s not a lot you can do now to reduce these new taxes on 2013 income. However, if you’re self-employed or have self-employment income from a part-time job, consider the tax-saving potential of a Simplified Employee Pension (SEP) IRA. You have until April 15 (or October 15 if you file an extension) to set up and fund a SEP for 2013, says Tim Steffen, director of financial planning for Robert W. Baird & Co., a wealth-management firm. Money stashed in a SEP IRA will reduce your taxable income. For 2013, you can contribute up to 20% of your self-employment income, up to $51,000.

If you work for an employer that doesn’t offer a 401(k) or other type of retirement plan, you have until April 15 to contribute to a deductible IRA, which will also reduce your taxable income. For 2013, you can contribute $5,500, or $6,500 if you were 50 or older last year.

One new tax provision could end up saving upper-middle-income taxpayers money. Congress imposed a permanent fix for the alternative minimum tax, a parallel tax system originally created to prevent wealthy taxpayers from using tax breaks to avoid taxes altogether. Because the original law was never indexed to inflation, the AMT has gradually affected more middle-income taxpayers. The legislation stopped that encroachment. Taxpayers who haven’t been subject to the AMT in the past are unlikely to get hit with it now. And because the legislation also included inflation adjustments, some taxpayers who were just over the threshold for the AMT may no longer have to pay it.