Individual Income Tax Updates for the 2013 Filing Season

Agenda

Introduction Agenda Income Tax Rates New Taxes Phase-Outs 2014 Outlook Terminology Contact Information

Income Tax Rates

Federal Rates for 2013:– Ordinary Income:• 10, 15, 25, 28, 33, 35, and 39.6%

– 39.6% new for 2013– 39.6% rate applies at $400,000/$450,000

– Long-Term Capital Gains:• 0, 15, and 20%

– 0% rate applies when in the 10 or 15% brackets noted above

– 20% new for 2013– 20% rate applies when in the 39.6% bracket noted above

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Income Tax Rates (cont.)

Federal Rates for 2013 (cont.):– Employee portion of Medicare:• 1.45% on income up to $200,000/$250,000• 2.35% on income above $200,000/$250,000• MFJ Amounts are combined

– Example:» Husband earns $150,000, pays 1.45%» Wife earns $150,000, pays 1.45%» Combined, they have $300,000, which is $50,000 over

limit, so that $50,000 is subject to additional 0.9% tax

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Income Tax Rates (cont.)

California Rates for 2013:– 1, 2, 4, 6, 8, 9.3, 10.3, 11.3, and 12.3%• 10.3% rate applies at $250,000/$500,000• 11.3% rate applies at $300,000/$600,000• 12.3% rate applies at $500,000/$1,000,000

– Additional Mental Health Tax of 1% applies at $1,000,000

– No rate difference between ordinary and capital

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New Taxes

Medicare Tax of 3.8% on net investment income– Interest, Dividends, Annuities, Royalties, Rents– Other passive trades or businesses– Gain from non-trade or business property– Gain from sale of principal residence to extent gain

exceeds §121 exclusion ($250,000/$500,000)– Tax is on lesser of net investment income (NII) or the

amount by which Modified AGI (MAGI) > $200,000/$250,000• Example: MFJ, NII = $100,000, MAGI = $300,000, tax would be

on lesser ($300,000-$250,000 = $50,000, which is less than $100,000)

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Phase-Outs

Itemized Deductions:– Federal:• Starts at AGI of $250,000/$300,000• Phase-out equals 3% of each dollar above AGI

threshold• Does not include medical, investment interest, and

casualty, theft or wagering losses• Can have up to 80% phased out• Example: MFJ $400,000 AGI, so $400,000-

$300,000=$100,000x3%=$3,000 of itemized deductions phased-out

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Phase-Outs (cont.)

Itemized Deductions:– California:• Starts at AGI of $172,615/$345,235• Phase-out equals 6% of each dollar above AGI

threshold• Does not include medical, investment interest, and

casualty, theft or wagering losses• Can have up to 80% phased out• Example: MFJ $400,000 AGI, so $400,000-

$345,235=$54,765x6%=$3,286 of itemized deductions phased out

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Phase-Outs (cont.)

Personal Exemptions:– Federal ($3,900 in 2013):

• Starts at AGI of $250,000/$300,000• Phase-out equals 2% for each $2,500 of AGI above

threshold• Can have up to 100% phased out

– California ($106 in 2013):• Starts at AGI of $172,615/$345,235• Phase-out equals $6/$12 for each $2,500 of AGI above

threshold• Can have up to 100% phased out

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Phase-Outs (cont.)

Personal Exemptions (cont.):– Example: MFJ $400,000• Federal: $400,000-

$300,000=$100,000/$2,500=40x2%=80% phased out• California: $400,000-

$345,235=$54,765/$2,500=21x$12=$252 phased out

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2014 Outlook

Numerous federal provisions (55 total) expired at end of 2013, including:– Deduction for state and local sales taxes– Premiums for mortgage insurance deductible as

qualified residence interest– Tax-free IRA distributions to charity– Energy-efficient home improvement tax credits– Exclusion from income for discharge of debt on

principal residence

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2014 Outlook (cont.)

Pending Federal Legislation:– President Obama’s budget– The Republican’s budget– Rep. Camp’s tax simplification bill– The Senate’s tax simplification bill

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Terminology

§ ___ = Code section of the Internal Revenue Code

Two figures provided (e.g. $250,000/$300,000) represent Single and Married Filing Joint filing status

AGI = Adjusted Gross Income MFJ = Married Filing Joint Long-Term = one year or more

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Contact Info

Mark A. Bellows, CPAGALLINA LLP925 Highland Pointe Drive, #450Roseville, CA 95678(916) 784-7800Email: mbellows@gallina.comLinkedIN: Mark BellowsTwitter: RE_Const_CPA