What’s the summertime forecast? From a tax perspective, the outlook calls for planning now to prepare for changes gathering on the horizon – specifically, provisions currently expected to take effect in January 2013. Here are four new rules to think about during your mid-year tax review.
- A decrease in tax-free contributions to your flexible spending account. Starting in January 2013, the maximum you can contribute to your FSA will be $2,500. In addition, the “use it or lose it” feature of FSAs means you won’t be able to carry any 2012 excess remaining in your account into 2013 (unless your plan provides a 2½ month grace period for using prior-year funds).
Planning move: Schedule elective medical procedures during the last half of 2012.
- An increase in the threshold for claiming the itemized medical expenses deduction. Do you itemize? For 2012, you can claim a deduction on your federal income tax return for qualified medical expenses that exceed 7.5% of your adjusted gross income (AGI).
Beginning in 2013, if you’re under age 65, your medical expenses will have to exceed 10% of your AGI to be deductible. This is the same percentage applied to qualified medical expenses when calculating the alternative minimum tax.
Planning move: Review your itemized deductions for 2012 to determine whether accelerating or delaying deductions makes the most sense for you. What to keep in mind: phase-outs and other limitations to itemized deductions that were in effect in prior years, as these may return in 2013.
- An increase in Medicare tax on certain wages. The amount of Medicare tax you pay on wages and self-employment income is scheduled to go up next year. When you’re single and your wages are greater than $200,000, your employer will withhold an additional 0.9% of Medicare tax from your paycheck. Are you self-employed? The tax applies when net self-employment income exceeds the threshold. The income threshold is $250,000 for married couples.
Planning move: If you’re self-employed, review the way your business is organized. While you always want to pay yourself a reasonable amount of compensation, some entity types can allow for flexibility in the timing of wages or salary.
- A new Medicare tax on unearned income. You probably associate Medicare tax with earned income – that is, the 1.45% tax your employer deducts from your pay. But a provision in the 2010 health care laws extends the Medicare tax to certain unearned income, beginning in 2013.
The new surtax is a flat rate of 3.8%, and will apply to interest, dividends, capital gains, annuities, royalties, and rents. It kicks in when your AGI exceeds $250,000 (for married filing jointly). When you file as single, the AGI threshold is $200,000.
Planning move: Consider adding tax-exempt bonds to your portfolio. The interest is not subject to the new tax. Roth conversions and selling assets with capital gains may also be a wise move in 2012.
Many other tax law changes are expected in 2013. Timely planning is essential for preserving tax- saving opportunities. Please give us a call to discuss strategies to put in place now to maximize your benefits.