Avoid tax surprises now and lower your tax bill
No one likes a surprise at tax time, especially when it could mean a higher tax bill. Yet many workers and investors may be blindsided by recent tax law changes that could result in a significant tax hit on their 2013 returns.
Avoiding those nasty tax surprisesPlay Video
Cramer: Here's what's going on with Costco
Cramer's Mad Dash: These stocks are going to fly
Costco earnings hit by low gas prices
Opening Bell, May 28
A new change that many taxpayers may not have considered is the 3.8 percent tax on net investment income.
"It's going to surprise a lot of people," said certified financial planner Michael Gibney of Highland Financial Advisors in Riverdale, N.J.
Many high-income taxpayers will be impacted, as the net investment income tax will apply to individuals whose modified adjusted gross income is more than $200,000 (or more than $250,000 for married couples). The tax will impact some investments many taxpayers might not have considered, said Gibney.
"It will include capital gains, interest income, dividend income, passive business income and net rental income. If you have a house on the shore and you rent it in the summer and you get rental income, that will be part of this new net-interest income tax, too," he said.
This new net investment income tax comes on top of other tax changes, including:
- An increase in the top marginal tax rate to 39.6 percent (it was 35 percent in the 2012 tax year) on income above $400,000 for singles and $450,000 for married couples filing jointly.
- A new 20 percent tax rate on capital gains and qualified dividends (it was 15 percent in 2012) for taxpayers in that top tax bracket.
- And an additional Medicare payroll tax of 0.9 percent on earned income above $200,000 for individuals and $250,000 for couples.
All of these increases mean that many people with high incomes may have underpaid their taxes in 2013 — and could face a whopping tax bill. Melissa Labant, director of tax advocacy at the American Institute of CPAs, recommends calculating your potential tax bill as soon as possible. "The only thing worse than having a large tax bill come April 15 is being surprised about it," she said. Knowing about a large tax bill early will give you time to find the cash to pay for it.
There may be ways to reduce your taxable income, too. By opening and making contributions to certain tax-advantaged accounts before the April 15 tax-filing deadline, you may be able to cut your 2013 tax bill. Here are three tools that could help you:
Traditional IRA: You may be eligible to put in up to $5,500 into a traditional IRA (or $6,500 if you're 50 or older). However, you'll need to check the IRS website for income limits and eligibility.
SEP IRA: Small-business owners and those who are self-employed can contribute up to 25 percent of their compensation, to $51,000, in a SEP IRA.
Health savings accounts: Individuals can deposit up to $3,250 and families up to $6,450 into a health savings account. If you're 55 or older, you can put in an additional $1,000.
—CNBC's Sharon Epperson, Personal Finance Correspondent. You can follow her on Twitter @Sharon_Epperson.