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Five tax increases effective in 2013 for upper income earners

Posted by Jamie Downey January 31, 2013 09:09 AM

The recently passed American Taxpayer Relief Act of 2012 and the health care reform law which was passed back in March 2010 have various tax increases on upper income earners. These tax increases are all effective in the 2013 tax year. The five major tax increases are an increase in the Medicare tax by 0.9%, applying a 3.8% Medicare levy to net investment income, reinstatement of phase outs for itemized deductions and personal exemptions, an increase of the dividend and capital gains rate to 20%, and an increase to the top income tax bracket to 39.6%.

To add confusion, many of these additional new tax schemes become effective at different income levels. The following graph.pdf and discussion lays out the tax and the income level which it kicks in.

0.9% Medicare surtax on wages – This is a product of the healthcare reform law. It increases the Medicare tax imposed on wages by 0.9%. It applies to wages in excess of $250,000 for married couples. It applies to wages in excess of $200,000 for single filers. One should note that this applies to wages and not other forms of income. (Unfortunately, most other forms of income are addressed in the next bullet.)

3.8% Medicare tax applied to net income – Medicare taxes have historically only been assessed against wages. Effective January 1, 2013, Medicare taxes will now apply to one’s net investment income at a rate of 3.8%. Investment income includes: interest, dividends, capital gains, rental income, royalty income, and passive activity businesses. The tax is assessed on joint filers with a modified adjusted gross income (MAGI) over $250,000. For single filers it is assessed with a MAGI over $200,000.

Phase out of itemized deductions and personal exemptions – The phase out rules have been reinstated. For a married couple, these rules reduce the amount of otherwise allowable itemized deductions by 3% of adjusted gross income (AGI) in excess of $300,000. As an example, if a married couple has AGI of $400,000 they will lose $3,000 of their otherwise allowable itemized deductions. For single taxpayers the phase out rules become effective on AGI in excess of $250,000.

Personally exemptions are also subject to phase out rules beginning in the tax year 2013. Under these rules, the exemption that can be taken by a married couple is reduced by 2 percent for each $2,500 in which AGI exceeds $300,000. As an example, if a married couple earns $325,000, their exemption would be reduced by 20 percent. At $425,000, their personal exemptions is fully phased out and the couple receives no benefit. For a single person, the phase out of exemptions kick in at $250,000.

Increase in qualifying dividend and capital gains tax rate – Qualifying dividends and capital gains will be taxed at a rate of 20% on income in excess of $450,000 for joint filers, $400,000 for single filers. This is an increase from the previous 15% tax rate previously applied to this income. Combine this increase with the 3.8% Medicare tax on net investment income noted above, and certain upper income earners might see a 59% increase on taxes relating to this type of income; from 15% to 23.8%.

Increase in the federal income tax rate – As often discussed, an increased top federal income tax bracket of 39.6% has been added. This will apply to taxable income earned in excess of $450,000 for married couples and $400,000 for single filers.

Governor Patrick is also looking to increase the Massachusetts income tax to 6.25%, and reduce a series of tax deductions. This is still to be determined, but you can be sure that state tax increases are on the horizon.

Live personal finance chat Tuesday

Posted by Julie Balise January 28, 2013 04:24 PM

Deborah Levenson, vice president of financial planning at Braver Wealth Management LLC, will take your questions live Tuesday, Jan. 29 at noon.

Five signs it is time to find a financial planner

Posted by Julie Balise January 22, 2013 03:48 PM

Deborah Levenson is vice president of financial planning at Braver Wealth Management LLC. She will be hosting a live chat on Tuesday, Jan. 29 at noon.
January is a great time of year to put your financial life in order. It is often a busy time for financial planners, as many consumers reach out for help in getting organized and planning for the future. Here are five signs that you may need to seek professional help with your financial life:

1. You are counting the days until you can retire.
Can you really afford to retire and then live for another 30-40 years? Often it is difficult to know whether you are truly “safe” or just feeling optimistic.

A financial planner can help clarify where you stand by running realistic long-term financial projections. This will help you to clearly see whether you are on track to live the type of retirement lifestyle you are seeking or not. A planner can evaluate the impact of your working longer, if necessary, and can identify specific steps you can take between now and your target retirement date to improve your odds of retiring safely and securely.

2. Your life is changing.
If you recently were married or divorced, lost a loved one or brought a child into the world, then now is the time to pay attention to your finances. Decisions around buying life insurance to protect a new child, creating a post-divorce budget, or determining how to invest a recent inheritance are all areas where a good planner can provide real clarity and helpful next steps.

3. You can’t sleep at night due to worry about your investments.
The financial meltdown in 2008 left many investors unsettled. Even though the markets have come back strongly since then, many individuals have remained on the sidelines in cash. Working with a planner to understand your true risk tolerance and to design a prudent plan for getting back on track with your investing can help you reach your long-term goals.

4. You risk divorce if you can’t get on the same page as your spouse.
Couples often have trouble seeing eye to eye on decisions around spending versus saving -- experiencing short-term pleasure (i.e. an exotic vacation) or delaying gratification for long-term rewards (i.e. living more simply now to facilitate a more comfortable retirement). Finding a diplomatic planner who can listen to you both and then facilitate your collaboration around current and future financial decisions can definitely improve the quality of your relationship and home life.

5. You are taking financial advice from your hairstylist.
Watch out for hot tips and “can’t lose” investment propositions. Investing always involves some level of risk and different people should approach investing from different perspectives. Be careful about acting on any financial advice offered by someone who does not know your full picture. They probably mean well, but do they really understand your tax situation, your current cash flow needs and your long-term goals?

Working with a financial planner allows you to build a smart long-term saving, spending and investment plan that is customized to your specific situation and can be modified over time as your life circumstances change.

Changes to alimony law in Massachusetts

Posted by Julie Balise January 8, 2013 02:40 PM

Besides an update in the 1970s, the state's antiquated alimony law dated back to the 16th century. That changed with a reform to the law last year, which was due in large part to Steve Hitner, the president and co-founder of the organization Mass Alimony Reform. Take a look at what's different.

Hitner will take your questions live on Friday, Jan. 11 at 2 p.m.

Fiscal Cliff Legislation’s Impact on Massachusetts Businesses and Small Business Owners

Posted by Jamie Downey January 2, 2013 09:35 AM

Yesterday, the US House of Representatives passed the “American Taxpayer Relief Act of 2012”, which is set to be signed by the President shortly. The bill’s volume of tax extensions is pretty extreme. It extends nine individual tax breaks, 31 business tax breaks, 12 energy tax breaks, as well as partially extending the current tax brackets. Much has already been written about the bill’s impact on individual tax rates. So here are the items most pertinent to Massachusetts businesses and small business owners:

Business Tax Extenders

Section 301 - Extension and modification of research credit – The research credit has been extended for two years, retroactively to January 1, 2012 and through December 31, 2013.

Section 308 – Extension of wage credit for employers who are active duty members of the uniformed services – This tax credit is provided to small business that provide wage payments to active duty members of the armed services. This credit has been extended through December 31, 2013.

Section 309 – Extension of work opportunity tax credit – The work opportunity tax credit is available to business that pay wages to a targeted group. The credit is available for wages paid in the first and second year of employment. There are various targeted groups, but the largest pool are qualified veterans of the armed services. This has been extended through December 31, 2013.

Section 311 - Extension of 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements - This creates a 15 year depreciation life for certain property. It has been extended for two years, retroactively from January 1, 2012 through December 31, 2013.

Section 315 – Section 179 increased expensing limitation – Businesses can deduct the cost of equipment placed in service under what is known as Section 179 deduction. This deduction was set at $139,000 in 2012 and $25,000 in 2013. This has been retroactively increased to $500,000 for 2012 and set at $500,000 for 2013. It is scheduled to revert to $25,000 in 2014.

Section 324 – Extension of temporary exclusion of 100 percent of gain on certain small business stock – Under certain rules, 100% of the capital gain on the sale of small business stock can be excluded from income. Various rules apply, but the stock needs to be held for more than five years. This has been extended for stock acquired in 2013.

Section 326 - Extension of reduction in S-Corporation recognition period for built in gains tax – For businesses that convert to an S corporation, the conversion is not a taxable event. However, following this conversion, the entity must hold the assets for ten years to avoid a tax on any built in gains at the time of conversion. This period has been reduced to five years for sales that occur in either 2012 or 2013.

Section 331 - Extension and modification of bonus depreciation – Bonus depreciation of 50% has been extended through the end of 2013.

Other Pertinent Sections

Section 101 - Permanent extension and modification of the 2001 Bush tax cuts – Amongst other things, this sets the estate tax rate at 40% for individual estates greater than $5 million. The gift tax exemption is also set at $5 million.

Section 102 - Permanent extension and modification of the 2003 Bush tax cuts - It extends the 15% capital gains rates, with an increase to 20% for upper income earners.

Section 103 – Extends of the 2009 Tax Relief – This extends for a period of 5 years the American Opportunity Tax Credit. This is a $2,500 tax credit on qualifying college tuition payments.

Section 104 – Permanent Alternative Minimum Tax (AMT) Relief – This permanently increases the AMT exemption to $78,750 from $45,000, then indexes the exemption to inflation. This is retroactive to the 2012 tax year. The increase in the exemption prevents many from falling under the AMT.

Local finance professionals share insights and advice on issues such as budgeting, managing debt, and retirement planning.

About the contributors

D. Abraham Ringer is a CERTIFIED FINANCIAL PLANNER practitioner and a Financial Adviser with Morgan Stanley Global Wealth Management in Boston. He is registered in MA, NH, NY and several other states to which his articles are directed. For more information please visit
Financial Planning Association™ of Massachusetts has 900 members who specialize in the financial planning process. Many of its members engage in philanthropic pro bono work in their communities, recommend legislation, elevate public awareness, promote financial literacy, and advocate for sound economic and tax policies.
Odysseas Papadimitriou is the founder of, a credit card and gift card marketplace, and, a personal finance site. He has more than 13 years of experience in the personal finance industry, and previously served as senior director at Capital One.

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