2013 Income, Estate, & Gift Taxes

Ag Econ Current Issues

May 14, 2013

J C. Hobbs - Assistant Extension SpecialistOSU Department of Agricultural Economics

2013

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

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.

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.

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.

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)

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).

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.

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.

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

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.

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).

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.

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.

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

Personal Exemptions

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

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

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.

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.

Estate Taxes

• Rates:– 2013 maximum rate is 40 percent

• Exemption amount:– 2013 exemption amount is $5.25 million – Indexed for inflation

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.

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.

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

The End!

• Questions

• Comments

• Concerns

Contact Information

J C. Hobbsjc.hobbs@okstate.edu

580-237-7677

Oklahoma Cooperative Extension Service

Oklahoma State University