ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel

Preparing For The Tax Law Changes In 2013

Updated on March 2, 2013

Tax Changes

The topic of taxes is always one which is greatly debated from both a political as well as an economic perspective. Regardless of one’s political persuasion on such issues, one constant always remains the same. We each do all that we can to avoid paying these taxes, hopefully within the limits of the law. With the end of the 2012 elections it is still a bit difficult to be prepared as there are numerous changes set to take place on an automatic basis, and other still being negotiated.

The tax code has various aspects that affect the individual as well as corporate entities. All changes to the tax code affect every one of us at least indirectly, if not directly. But let’s have a look at the pending changes for 2013 assuming no legislative action so we can be better prepared.

Taxes on Investments & Savings…Starting in 2013 as part of the Health Care and Education Reconciliation Act you must add a new 3.8% Medicare tax on all of your investment income. This includes interest from the bank, dividends, capital gains, rental income & royalties. These are sources of income which the IRS describes as "unearned income" sources. However, the tax is a bit more complicated. This new surtax is 3.8% of the lesser of the taxpayer’s net investment income; or excess of adjusted gross income (AGI) over the "threshold amount." (The threshold amount is $200,000 for single filers; $250,000 for married filing jointly; and $125,000 for married filing separately.) For Example...In the case of a home sale, the captial gain on the sale increases the AGI by the amount of the gain. The gain is added to other income sources and if it totals more than the threshold, you are subject to the tax. As a result of the new taxes on investment income, it is important that going forward you note the term "AGI". This makes maximizing tax shelters like 401k/403b plans and other employer sponsored plans more important. Contributions to these plans bring down the AGI. This may also make 2012 a good year under certain circumstances to realize some capital gains on investments you were considering selling to capture the lower tax rate and accelerate the selling. Additionally, tax loss harvesting strategies will become more important as a result of this new tax on investment income. To understand some more basic strategies on tax loss harvesting read below.

Capital Gains…The current rate on long capital gains tax is a maximum of 15%. For those in lower income ranges it is currently lower than that. The new rate on long term capital gains will be 20%. This includes the long term capital gain distributions commonly paid out to holders of mutual fund positions. This again reinforces the need to focus on tax loss harvesting strategies. The new rate will be 20% plus another 3.8% for the new healthcare tax for those over the threshold for a combined 23.8%. Also keep in mind that those subject to AMT may also pay higher rates on capital gains.

Qualified Dividends…This is a potential big change for many investors. Many investors utilize dividend income as a source to supplement their retirement income. In some cases the yield of a dividend may be what induced the individual to purchase the security even without the need for income. There is certain criteria a company must meet to achieve the definition of “Qualified Dividends”. Such dividend payments impact not only stock holdings but also a portion of payments received by mutual fund holdings. Currently those in lower income brackets below 15% pay ZERO. Those in personal income tax ranges over 15% actually pay 15% on qualified dividends. Beginning in 2013 the rules revert back to pre-2003. This means those individuals in the 15% or lower bracket will pay 10% rather than ZERO on qualified dividends and those above 15% will pay 20% on the same dividends. Keep in mind the Presidents proposed 2013 budget had an increase on dividend income to as high as the maximum marginal income tax rate for 2013 of 39.6%. When you add in the Medicare tax increase mentioned above, that would have brought you to a whopping 43.4%. Keep in mind this additional increase was part of a tax proposal that was NOT passed. However with the 2012 elections now over this is an important one for investors to keep an eye on. Should dividend tax rates reach that high of a level, it would be prudent to rethink your investment strategy and potentially introduce more tax free municipal securities to avoid the impact.

Healthcare Expenses…Currently if you have health care out of pocket expenses, it is not deductible unless it exceeds 7.5% of your AGI. For individuals whom are subject to the Alternative Minimum Tax (AMT) the phase out is 10% of their AGI. Beginning in 2013 the expense must exceed 10% of AGI for all those under age 65.

Flexible Spending Accounts…The maximum contribution to these will be reduced in 2013 to $2,500.00.

Basic income tax Rates…There are numerous aspects to what affects your Federal income marginal tax rate. But as it stands now, the current marginal rates will be increased accordingly. There are 6 tiers to the current marginal income tax rate schedule. Currently they are 10%, 15%, 25%, 28%, 33%, & 35%. Beginning in 2013 they will collapse into a 5 tier system of 15%, 28%, 31%, 36%, & 39.6%. Additionally, employers are required to withhold an additional 0.9% on employee's wages in excess of the threshold amounts referenced earlier.

Estate Taxes…For many investors this is not a concern. The current phaseout is an exclusion of the first $5,120,000.00 of one’s estate. However, beginning in 2013 the phase out drops to just $1,000,000.00 of their remaining estate. While this may seem like a lot of money, consider the totality of your taxable estate is not only you liquid assets. But your home, personal possessions and life insurance proceeds. Any amount in excess of the $1,000,000.00 phaseout is set to be taxed at 55%. It is important to see how congress and the president address these changes and make sure your estate plan is prepared to maneuver around the potential impact.

Gifting…The current estate planning phaseout's mentioned above are identical to the changes in the gift tax rules. The maximum lifetime gift is currently $5,120,000.00 and will be reduced to $1,000,000.00 beginning January 2013. However the gift tax rate is assessed differently.

Generational Skipping Tax (GSTT)...Like the new estate tax rate, the new GSTT rate will increase to 55% with a new lifetime exemption being dropped to $1,000,000.00

Step up in basis...There will be no limit to a step up in cost basis on inherited assets for the purpose of capital gains as there was in 2010. This is set to be unlimited.

There are various other changes set to expire to prior levels such as the AMT patch. These are just a few items to keep an eye on that may affect the individual investor. Tax planning is an important part of the financial planning process that should include your financial advisor, tax advisor and estate attorney working on your behalf. The tax law is in a constant state of change and you the taxpayer are the target. While you should always stay within the guidelines of the law, that doesn’t stop you from becoming a moving target.


Numerous aspects of the 2013 tax code have now been made permanent. For an updated look please view the following hyperlink.


    0 of 8192 characters used
    Post Comment

    No comments yet.


    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

    For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at:

    Show Details
    HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
    LoginThis is necessary to sign in to the HubPages Service.
    Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
    AkismetThis is used to detect comment spam. (Privacy Policy)
    HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
    HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
    Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
    CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
    Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the or domains, for performance and efficiency reasons. (Privacy Policy)
    Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
    Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
    Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
    Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
    Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
    VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
    PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
    Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
    MavenThis supports the Maven widget and search functionality. (Privacy Policy)
    Google AdSenseThis is an ad network. (Privacy Policy)
    Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
    Index ExchangeThis is an ad network. (Privacy Policy)
    SovrnThis is an ad network. (Privacy Policy)
    Facebook AdsThis is an ad network. (Privacy Policy)
    Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
    AppNexusThis is an ad network. (Privacy Policy)
    OpenxThis is an ad network. (Privacy Policy)
    Rubicon ProjectThis is an ad network. (Privacy Policy)
    TripleLiftThis is an ad network. (Privacy Policy)
    Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
    Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
    Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
    Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
    ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
    Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)