2013 Income, Estate, & Gift Taxes Ag Econ Current Issues

1. 2013 Income, Estate, & Gift TaxesAg Econ Current Issues May 14, 2013 J C. Hobbs - Assistant Extension Specialist OSU Department of Agricultural Economics

2. 2013 In 2013, most households will see the highest income tax burden since 2008.

3. 2013 Income Tax Rates • 2013 and future rates are to be: 10, 15, 25, 28, 33, 35, and 39.6 percent. (a 3.8% surtax will impact high income taxpayers) • The 39.6% rate applies to: • Single Filers with Taxable Income > $400,000 • Married Filing Joint with TI > $450,000 • Married Filing Separate with TI > $225,000 • Head of Household Filers with TI > $425,000.

4. Capital Gain Rates • Capital gains for 2013 • 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 (plus a 3.8% surtax from Obamacare) for taxpayers in the 39.6% income tax bracket.

5. Dividends • Qualified dividend rates for 2013 • 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 (plus a 3.8% surtax from Obamacare) for taxpayers in the 39.6% income tax bracket.

6. Self Employment and Social Security Taxes • For 2012: Self-employment tax – a 2% reduction in social security taxes (FICA) from 12.4% to 10.4% or a payroll tax reduction for the employee share of social security taxes (FICA) from 6.2% to 4.2%. • For 2013: Back to 12.4% for self-employed individuals and 6.2% for employees. (roughly a decrease in take home pay by $100 per month)

7. Section 179 Expensing • 2013 is $500,000 with a $2,000,000 investment limit. • Purchased capital assets that are depreciable (new or used). • Must not create a loss (any amount that is not used due to the taxable income limit may be carried forward to future years).

8. Section 179 Expense Election • Purchased capital assets that are depreciable under MACRS deprecation rules. • Property generally must be used in a trade or business. • Farm machinery and equipment; draft, breeding, or dairy livestock; grain storage facility; single purpose livestock or horticultural structures; and field tile all qualify for the Section 179 expensing.

9. Section 179 Expense Election • General-purpose farm buildings, such as machinery sheds or hay barns, are not eligible for Section 179 expensing. • The amount expensed is treated the same as depreciation and is subject to recapture when the asset is sold.

10. Additional First-Year Depreciation • 2013: 50% Additional First-Year Depreciation is allowed for qualifying property placed in service through 12/31/2013. • Property must have a depreciable life of 20 years or less. • Original use must occur with the taxpayer claiming the deduction (in other words - new property). • Expires January 1, 2014

11. What is New Property? • Never placed in service by anyone else other than the current owner (original use by the taxpayer) • New Cow - original use applies to the owner when she has her first calf. • New Bull - original use applies to the owner when he is first used as a sire.

12. Medicare Tax on Unearned Income begins Jan. 1, 2013 • New Medicare Tax on unearned income at 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).

13. Medicare Tax on Unearned Income (cont.) • Unearned income does not include distributions from qualified retirement plans. • Rule 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.

14. Medicare Tax on Earned Income after Jan. 1, 2013 • 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.

15. Personal Exemption & Itemized Deduction Phase-outs for 2013 • Phase-out based on Adj. Gross Income • joint filers = $300,000 • single filers = $250,000 • head of household = $275,000 • married filing separate = $150,000

16. Personal Exemptions The personal exemption amount is reduced 2% for every $2,500 that your Adjusted Gross Income exceeds the threshold amount.

17. Itemized Deductions • Up to 80% of itemized deductions for higher income taxpayers will be subject to a 3% phase-out (“Pease limitations”) • The phase-out does not affect the deductible amount of medical expenses, investment interest, casualty or theft losses, and gambling losses

18. Itemized Medical Expenses • Itemized deduction floor for medical expenses 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.

19. 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.

20. Estate Taxes • Rates: • 2013 maximum rate is 40 percent • Exemption amount: • 2013 exemption amount is $5.25 million • Indexed for inflation

21. Estate Taxes • Portability between spouses made permanent • Husband and wife can transfer $10.5 million of assets free of estate taxation. • The unused estate tax exemption ($5.25 million) can be transferred from the deceased spouse and thus can be used by the surviving spouse when he/she passes.

22. Example of Portability • Husband passed in 2010 and the value of the estate was $2.0 million. The exemption was $3.5 million, so an unused amount of $1.5 million was left from the husband that the wife can use later. • In 2013, the wife passes and the fair market value of the estate is now $6.0 million, she can use her $5.25 million exemption plus up to $1.5 million (a total of $6.75 million) which was not used when her husband passed, thus avoiding estate tax completely.

23. Gift Taxes • Federal Gift Tax Exclusion (annual) • $14,000 per year per person ($28,000 H&W) • Gift Tax Rates: • 2013 maximum rate is 40 percent • Exemption Amount (lifetime) • 2013 exemption amount is $5.25 million • Indexed for inflation

24. The End! • Questions • Comments • Concerns

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