2013 and 2014 Income and Estate Tax Issues

1. 2013 and 2014 Income and Estate Tax Issues January 14, 2014 J C. Hobbs - Assistant Extension Specialist OSU Department of Agricultural Economics

2. 2013 & 2014 Income Tax Rates • 2013 and the future rates are to be: 10, 15, 25, 28, 33, 35, and 39.6 percent. • 39.6% rate applies to: • Single Filers with TI > $400,000 ($406,750) • Married Filers with TI > $450,000 ($457,600) • Head of Household Filers with TI > $425,000 • Married Filing Separate with TI > $225,000

3. Tax Rates: Single Filers

4. Tax Rates: Married Filing Joint

5. Net Investment Income Taxbeginning in 2013 • Net Investment Income Tax on unearned income at a 3.8% rate if modified adjusted gross income exceeds $250,000 for married filing joint or $200,000 all others. • Net investment income - applies to interest, dividends, annuities, royalties and rent (unless it is from business activities). • Net income from the sale of capital investments including stock and real estate (unless it is from the sale of business property).

6. Net Investment Income Taxafter Dec. 31, 2012 • Does not include wages, social security, self-employment income, alimony, unemployment, tax exempt interest, distributions from qualified retirement plans, etc. • Does not apply to the exclusion allowed on the sale of a principal residence of $250,000 for individuals or $500,000 on a joint return.

7. Additional Medicare Taxafter Dec. 31, 2012 • New Medicare Tax on earned income at 0.9% on wages and self-employment exceeding $250,000 for joint returns and surviving spouses or $200,000 single filers and all others. • Applies only to the employees share of the Medicare tax ( not the employers) and to self-employment income.

8. Itemized Deductions • Up to 80% of itemized deductions for higher income taxpayers will be subject to a 3% phase out (“Pease limitations”) • Reduction does not affect deduction of medical expenses, investment interest, casualty losses, and gambling losses

9. Phaseout Ranges Filing Status Start End Single $250,000 $327,501 Married filing joint $300,000 $422,501 Married filing sep. $150,000 $211.501 Head of household $275,000 $397,501

10. Provisions Taking Effect in 2013 • Itemized deduction floor for medical expense will rise to 10% of AGI for taxpayers under age 65 • During 2013 through 2016, the floor remains at 7.5% for taxpayers who are 65 years of age or older.

11. Capital Gain Rates • Capital gains for 2013 and 2014 • Net capital gain is taxed at the 0% rate for taxpayers in the 10% and 15% income tax brackets. • Net capital gain is taxed at the 15% rate for taxpayers in the 25%, 28%, 33%, and 35% income tax brackets. • Net capital gain is taxed at the 20% rate for taxpayers in the 39.6% income tax bracket.

12. Dividends • Qualified dividend rates for 2013 and 2014 • Qualified dividends are taxed at the 0% rate for taxpayers in the 10% and 15% income tax brackets. • Qualified dividends are taxed at the 15% rate for taxpayers in the 25%, 28%, 33%, and 35% income tax brackets. • Qualified dividends are taxed at the 20% rate for taxpayers in the 39.6% income tax bracket.

13. Self Employment and Social Security Taxes • For 2013 and 2014: FICA has reverted back to 12.4% for self-employed individuals and 6.2% for employees.

14. Alternative Minimum Tax • Finally Fixed the Exemption issue (no need for an annual AMT patch to be passed by Congress). • 2013 and beyond the exemption amount will be indexed for inflation.

15. Credits • Adoption credit has been made permanent • The $1,000 child tax credit for children under 17 has been made permanent • Dependent care credit has been made permanent • The simplified Earned Income credit has been made permanent • American Opportunity (education) credit has been extended through 2018

16. Estate Taxes • Rates: • 2013 & 2014 maximum rate is 40 percent • Exemption amount: • 2013 exemption amount is $5.25 million • 2014 exemption amount is $5.34 million • The exemption amount is indexed for annual inflation.

17. Estate Taxes • Portability between spouses made permanent • Husband and wife can transfer $10.68 million of assets free of estate taxation. • The unused estate tax exemption ($5.34 million) can be transferred from the deceased spouse and thus can be used by the surviving spouse when he/she passes.

18. Gift Taxes • Federal Gift Tax Exclusion (annual) • 2013 & 2014 exclusion is $14,000 per person ($28,000 husband & wife using gift splitting) • Gift Tax Rates: • 2013 & 2014 maximum rate is 40 percent • Exemption Amount (lifetime) • 2013 exemption amount is $5.25 million • 2014 exemption amount is $5.34 million • Indexed for inflation annually

19. Section 179 Expensing • Purchased capital assets that are depreciable (new or used). • 2013 was $250,000 with a $500,000 investment limit • 2014 reverted back to $25,000 with a $200,000 investment limit. (Will Congress enact new legislation to modify this?)

20. Additional First-Year Depreciation • 2013: 50% Additional First-Year Depreciation is allowed for qualifying property placed in service through 12/31/2013. • Expired effective January 1, 2014

21. Contact Information J C. Hobbs jc.hobbs@okstate.edu 580-237-7677 Oklahoma Cooperative Extension Service Oklahoma State University