Taxing Times – September 2013 Newsletter

While you may not want to begin thinking about it in September, there are some “taxing” issues that you need to be aware of for 2013 and on the horizon for 2014.  As you may recall from early January, the Fiscal Cliff law resulted in a number of federal income tax changes, some permanent and others just extended for one year.

Medicare surtax

For high earning individuals, you may already have noticed a slight decline in your take home pay, for as you surpassed $200,000 in wages, your employer was required to begin deducting an additional 0.9% on your Medicare-eligible wages.  This is in addition to the 1.45% you are already paying in Medicare taxes. While this new surtax will result in automatic additional withholding for an individual with earnings above $200,000, the tax can also be triggered by combined earnings of spouses, or the combination of wage earnings and self-employment income.

Filing Status

Threshold Amount

Married filing jointly


Married filing separately




Head of household


Qualifying Widow(er)



Ex. 1 – Single wage employee earns $225,000.  Once this employee hits $200,000 in earned wages, the employer will begin withholding an additional 0.9% on excess wages.  ($225,000-$200,000) * .9% = Additional Medicare taxation of $225.

Ex. 2 – Married couple, both wage employees.  Spouse 1 earns $190,000 and Spouse 2 earns $80,000.  The employers would not be responsible for additional withholding since neither individual’s wages exceed $200,000.  However, the combined wages of $270,000 = ($190,000 + $80,000) exceed the threshold of $250,000 for Married Filing Joint.  Therefore, the couple would be subject to additional Medicare tax of $20,000 * .9% = $180 when they file their federal income tax return.

Ex. 3 – Single filer has $130,000 in wages and $145,000 in self-employment income.  Filer’s wage income does not exceed the threshold of $200,000 so they are not subject to the excess tax on these wages.  However, in calculating the additional tax on self-employment (SE), the $200,000 threshold is first reduced by the earned wages of $130,000 to give a reduced SE threshold of $70,000.  The SE income of $145,000 exceeds the threshold of $70,000 by $75,000, so the additional Medicare tax would be due on the excess of $75,000, or total $675 in additional tax when they file their federal income tax return.

Net Investment Income Tax (NIIT)

NIIT is a new tax equal to 3.8% of the lesser of your net investment income or the excess of your modified adjusted gross income (MAGI) over the threshold amount of $200,000 for Single filers or $250,000 for Joint filers. The NIIT tax will be a part of your 2013 income tax filing, being calculated on Form 8960 as part of your Federal Form 1040. Net investment income includes net gains from the sale of securities (stocks, bonds, etc.), capital gains distributions from mutual funds, gain from the sale of investment real estate and gains from interests in partnerships and S-corps to the extent that you were a passive owner.  It can also apply to taxable gain on the sale of a personal residence in excess of the statutory exclusion amount (typically $250,000 for Single filers and $500,000 for Joint filers, subject to restrictions).

Ex. 1 – A Single filer has net gain from the sale of stocks totaling $65,000 and wage income of $125,000.  Because the MAGI of $190,000 is less than the threshold amount of $200,000 for a Single filer, this individual is not subject to NIIT.

Ex. 2 – A married couple sold an investment property (not their personal residence) for $600,000, which had a cost basis of $400,000, giving them a net gain of $200,000.  They also had wages of $180,000.  Their MAGI of $380,000 exceeds the threshold of $250,000 for Joint filers by $130,000.  Therefore, their NIIT is calculated on the lesser of the investment income of $200,000 or the excess of $130,000 over the threshold.  The NIIT is $130,000 * 3.8% = $4,940.

Tax Rate Changes for High Income Earners

  1. Single filers with taxable income over $400,000 and Joint filers with taxable income over $450,000 now have a 39.6% tax bracket on ordinary income rates.  This is up from the 35% highest tax bracket in 2012. See 2013 marginal tax brackets for Single and Joint filers below.

2013 Federal Income Tax Brackets



Married Filing Joint

Taxable Income

Marginal Tax Rate:


Taxable Income

Marginal Tax Rate:






























2.  Long-Term Capital Gains and Qualified Dividend rates have also increased to 20% for Single filers > $400,000 and Joint filers > $450,000.

Note:  In most cases, clients have exhausted their carry-forward losses from 2008-2009.  Therefore, given the general upward trajectory of the markets, the likelihood is high that you will have taxable gains this year to report on your 2013 tax returns.  Please consult with your financial advisor to check the status of your taxable gains for the year.

 3.  We have also seen a return of phase-outs on itemized deductions as well as personal exemptions which will affect the bottom line for high earners in 2013.

Roth Conversion Opportunities Expanded

There is a new provision specifically related to Roth conversions within employer retirement plans.  Current employees are now eligible to convert pre-tax amounts in employer 401(k), 403(b), TSP, and 457(b) plans to the Roth component of the employer plan without having to meet the requirement of separation from service or attainment of age 59 ½.  Two cautions in this provision:  employers will need to specifically address this in their plan documents before their employees can take advantage of the capability, and doing an in-service conversion could result in the triggering of the additional Medicare surtax, in which case the total taxes paid could be much higher than anticipated.  This is definitely a case where clients should carefully consider the ancillary consequences before executing an in-service conversion.

Temporary Tax-related Extensions for 2013

While the above changes are permanent, there were a number of tax breaks that were temporarily extended for 2013.  The following is a short list of some of the more applicable extensions:

  • Above the line deduction for college tuition
  • Tax-free transfers to charity from IRAs for those 70 ½ or older
  • Credit for energy-efficient improvements to your residence

What this really means for high earning clients is that your tax liability could look substantially different than it did in 2012.  If you are in a high earning situation, don’t let this be a surprise at tax filing time.  Many CPAs are scheduling meetings with their clients this fall to assess the specifics of their situation to ensure estimated payments or additional withholding can occur prior to year-end.

A 2014 Preview for North Carolina Residents

For those clients living in North Carolina, 2014 will bring a host of income tax changes.  The Tax Simplification and Reduction Act of 2013 was signed into law July 24, 2013 and takes effect January 2014.

1.  Individual Tax Rates

  • The current graduated income tax rates in NC of 6%, 7% and 7.75% will be replaced with a flat tax of 5.8% during 2014 and 5.75% for 2015 and beyond.
  • Eliminates the personal exemption
  • Eliminates the child tax credit for those earning over $100,000; retained at $100 per child for earnings between $40,000 and $100,000; increased to $125 per child for earnings < $40,000.
  • Eliminates both the exclusion of $2,000 for qualified private pension income and $4,000 for federal/state/local pension income.  However, NC does retain the “Bailey” settlement exemption for taxation of retirement benefits.  This settlement specifically applies to Federal/NC retirees who had 5+ years of creditable service as of 8/12/1989.
  • Raises the standard deduction to $15,000 for Joint; $12,000 for Head of Household and $7,500 for Single filers.
  • Limits itemized deductions for personal residence interest and property taxes to $20,000 for all filers.  Retains unlimited charitable deductions.
  • Retains the deduction for Social Security benefits.

2.  Other NC Tax-related Changes

  • Eliminates the sales tax holiday weekend in August and the Energy Star appliance sales tax holiday in November.
  • Eliminates the NC estate tax effective for estates of decedents dying on and after January 1, 2013.
  • Extends the NC Sales tax to certain service contracts, entertainment and entry tickets to certain attractions.
  • Corporate income tax rate reductions from current 6.9% to 6% in 2014, 5% in 2015 and further reductions if the state meets certain revenue targets in future years.

The guidelines governing taxation are complicated.  High earners need to be aware of the changes in federal taxation for 2013 and beyond.  Most all NC filers will begin to see differences in the state’s taxation beginning January 1, 2014.  While this is by no means an exhaustive list, it should help to highlight some of the changes which may apply to your situation so that you can begin to plan for and avoid surprises at tax time.


The information contained in this newsletter is informational only and should not be considered advice or a recommendation to resolve your particular tax questions or issue.  Please consult your financial advisor or tax professional if you have any questions regarding how these changes may impact your personal situation.