Personal Finance Update: Tax Changes 2013

Now that we’ve made it though the “cliff” and the “Mayan end of the world” scares, let’s take a look at what’s happened to taxes – and it’s been a lot. The payroll tax reduction hataxess ended, new Medicare surtaxes have kicked in, and some of the Bush income tax cuts have been eliminated. Let’s begin by looking at the one that will impact almost everyone, the payroll tax increase, then move to Medicare, then to personal taxes.

Payroll Taxes:

For the past two years the employees’ share of payroll taxes were reduced by two percent, this lowered level of payroll taxes has ended with the new tax law. This change has a broad impact, affecting 125 million households – so almost everyone is hit by it. On average this two percent payroll tax increase amounts to $16.37 a week from take home pay, which is just about equivalent to the average gain in weekly wages experienced by workers over the past year.

Medicare Tax on Earned Income:

0.9% Surtax. The changes in Medicare stem from (1) a new 0.9% surtax on earned income for high earners and (2) a new 3.8% surtax on net investment income for high income filers. As a result of the Patient Protection and Affordable Care Act (PPACA) commonly called Obamacare, high-earners must pay an additional 0.9% Medicare payroll tax on wages above $200,000 for individuals and $250,000 for couples. This means for earners above that threshold, the current 2.9% Medicare payroll tax will be increased to a total of 3.8%. This surtax only applies to the employee’s portion of the Medicare tax, not to the employer’s portion. Employers will withhold the additional tax once an employee’s wages reach the threshold. For more on the Medicare tax on earned income go to the IRS website on the Additional Medicare Tax.

3.8% Surtax on Net Investment Income. There is also a new 3.8% surtax on net investment income impacting higher income individuals. This tax affects only individuals with more than $200,000 in modified adjusted gross income (MAGI), married couples filing jointly with more than $250,000 of MAGI, and separate filers with more than $125,000 of MAGI.   For example, let’s look at a taxpayer filing as a single individual who makes $180,000 in wage income plus $90,000 from investment income. The individual’s modified adjusted gross income is $270,000. The 3.8 percent tax applies to the $70,000, which is the amount above the $200,000 threshold, and the individual would pay $2,660 in surtaxes.

Personal Taxes:

Tax Rates. The Bush income tax cuts had been scheduled to be eliminated, but have instead been renewed for all but high-income earners. A 39.6% rate will now apply to taxable income over $400,000 for singles, $425,000 for heads of household and 450,000 for married couples filing a joint return.

The tax rates for 2013 are:

Marrieds:

If taxable income is                                             The tax is
Not more than $17,850                                          10% of taxable income
Over $17,850 but not more than $72,500          $1,785.00 + 15% of excess over $17,850
Over $72,500 but not more than $146,400       $9,982.50 + 25% of excess over $72,500
Over $146,400 but not more than $223,050     $28,457.50 + 28% of excess over $146,400
Over $223,050 but not more than $398,350    $49,919.50 + 33% of excess over $223,050
Over $398,350 but not more than $450,000  $107,768.50 + 35% of excess over $398,350
Over $450,000                                                  $125,846.00 + 39.6% of excess over $450,000

Singles:

If taxable income is                                       The tax is
Not more than $8,925                                         10% of taxable income
Over $8,925 but not more than $36,250         $892.50 + 15% of excess over $8,925
Over $36,250 but not more than $87,850      $4,991.25 + 25% of excess over $36,250
Over $87,850 but not more than $183,250    $17,891.25 + 28% of excess over $87,850
Over $183,250 but not more than $398,350 $44,603.25 + 33% of excess over $183,250
Over $398,350 but not more than $400,000 $115,586.25 + 35% of excess over $398,350
Over $400,000                                                  $116,163.75 + 39.6% of excess over $400,000

Household heads:

If taxable income is                                         The tax is
Not more than $12,750                                        10% of taxable income
Over $12,750 but not more than $48,600       $1,275.00 +15% of excess over $12,750
Over $48,600 but not more than $125,450     $6,652.50 + 25% of excess over $48,600
Over $125,450 but not more than $203,150    $25,865.00 + 28% of excess over $125,450
Over $203,150 but not more than $398,350   $47,621.00 + 33% of excess over $203,150
Over $398,350 but not more than $425,000   $112,037.00 + 35% of excess over $398,350
Over $425,000                                                   $121,364.50 + 39.6% of excess over $425,000

Standard Deduction.  Other changes include a slight increase in the standard deduction, with marrieds getting $12,200, if one spouse is age 65 or older this climbs to $13,400, and if both are 65 or older $14,600. For singles the standard deduction is $6,100, and $7,600 if they’re 65 or older. For household heads it is $8,950 plus $1,500 more once they reach age 65.  Finally, the blind receive $1,200 more ($1,500 if unmarried and not a surviving spouse).

Phaseout in Itemized Deductions. High-incomer earners not only face a higher tax rate, but also lose some of their itemized deductions for 2013. This is referred to as the Please limitation, named after former Congressman Donald Please. The limitation for 2013 will kick in on AGI levels that exceed $300,000 for joint filers and $250,000 for individuals, indexed for inflation. Income over the applicable amount will trigger an itemized deduction limit of the lesser of (a) 3% of the adjusted gross income above the applicable amount, or (b) 80% of the amount of the itemized deductions otherwise allowable for the taxable year. (It should be noted that the Pease limitation doesn’t apply to medical expense deductions, the investment interest deduction, casualty, theft, or gambling loss deductions.)

Personal Exemptions. Other changes include an increase in the personal exemption to $3,900 for filers and their dependents. Once again, this write-off is phased out for high-incomers, being cut by 2% for each $2,500 of AGI over the same thresholds for the itemized deduction phaseout.

Investments:

While the tax rate on capital gains and dividends remains the same for most taxpayers, it jumps to 20% for high-income taxpayers, with high income taxpayers defined as singles with taxable income above $400,000 and couples over $450,000. When you look at this increase coupled with the new Medicare surtax, this rate jumps to 23.8% for high income taxpayers. For others, the old 15% rate still applies, and filers in the 10% or 15% tax bracket still qualify for the special 0% rate.

Alternative Minimum Tax:

While the Alternative Minimum Tax or AMT did not go away, exemptions went up for 2013. For 2013 they jump to $80,750 for couples and $51,900 for both singles and household heads, up from 2012 by $2,050 and $1,300, respectively. It will also automatically adjusted for inflation in the future. In addition, personal tax credits, such as those for tuition and dependent care, will continue to offset alternative minimum tax liability.

Social Security:

As is the case every year, the Social Security wage base rises this year to $113,700, which is a $3,600 boost. As noted earlier, because of the expiration of the 2% cut in the employee Social Security rate and the 0.9% Medicare surtax on high-earners, Social Security taxes are on the rise.

In terms of benefits, Social Security benefits go up 1.7% in 2013, this is less than half of 2012’s hike. The earnings limits also change, going up this year. Taxpayers who turn 66 this year do not lose any benefits if they make $40,080 or less a year. Taxpayers who are at least 62 but are not 66 by the end of 2013 can make up to $15,120 before they lose any benefits. There is no earnings cap once a beneficiary turns 66. The amount needed to earn Social Security credits also changes, going up to $1,160 a quarter. Thus, if you earn $4,640 anytime during 2013 you will capture the full four quarters of coverage.

Medicare:

For 2013, the basic Medicare Part B premium increases to $104.90 per month. For higher income taxpayers (modified adjusted gross incomes for 2011 exceeded $170,000 for couples or $85,000 for single people), the Part B and D premiums are much higher, with the total surcharges on upper-incomers running as high as $297.40 a month.

Medical Deductions:

Deducting Medical Expenses. For 2013, the threshold for deducting medical expenses jumps to 10% of AGI for singles under age 65 and married couples who file a joint return, unless at least one of the filers is age 65 or older in which case the 7.5%-of-AGI cap applies.

Ceiling on Deductible Payins. For 2013, the annual ceilings on deductible payins to health savings accounts rose to $6,450 for account owners with family medical coverage and $3,250 for single coverage. HSA owners born before 1959 can put in $1,000 more. The limitations on out-of-pocket expenses (for example, deductibles and copayments) increased to $12,500 for those with family coverage and $6,250 for single coverage, and the minimum policy deductibles increase to $2,500 for families and $1,250 for individuals.

Long-Term Care Premiums. Taxpayers 71 or older can write off up to $4,550 per person and those 61 to 70 can write-off up to $3,640. For those 51 to 60 the maximum is $1,360, for those age 41 to 50 $680, and 40 and younger $360. In addition, the limit for tax free payouts under such policies increases to $320 a day.

Savings Plans:

401(k), 403(b), 457 Plans and SIMPLES. The maximum contribution is $17,500 for 2013, and for taxpayers born before 1964 it is up to $23,000. The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan remains unchanged at $5,500. The limit on SIMPLEs is $12,000, and taxpayers 50 or older in 2013 can contribute an additional $2,500. For more on 401(k) plans, check out the 401khelpcenter.com.

Contribution and income limits for IRAs and Roth IRAs. For 2013 the contribution limits for IRAs and Roth IRAs is raised to $5,500, $500 more than for 2012. Anyone who was born in 1963 or earlier can put in an extra $1,000. In addition, the income ceiling on Roth IRA contributions goes up. For 2013, contributions phase out for Roth IRAs at AGIs of $178,000 to $188,000 for couples and $112,000 to $127,000 for singles.

For 2013 the phaseout range for deducting an IRA contribution when you are covered by a retirement plan at work ranges from $95,000 of AGI to $115,000 for couples and from $59,000 to $69,000 for singles.

Education:

For 2013 the lifetime learning credit starts now phase out over the range from $53,000 to $63,000 of AGI for singles and $107,000 to $127,000 for couples. In addition, for 2013, the income caps for EE bonds tax free for education are higher, with the exclusion starts phasing out above $112,050 of AGI for married couples and $74,700 for singles and ends when AGI hits $142,050 and $89,700, respectively.

Adoption:

Adoption Credit.  For 2013, the adoption tax credit can cover up to $12,770 of costs, a $120 boost.   If the credit is more than a filer’s tax liability, the excess is not refundable.

When the adoption is for a special needs child, the full $12,770 credit is available, even if it cost less.

Continued Tax Breaks:

American Opportunity Tax Credit.  The American Opportunity Tax Credit was continued.

Mortgage debt tax relief.  Mortgage debt tax relief was extended.  As a result, home owners facing short sales, reduced loan principals, or foreclosures avoid paying taxes on any debt still owed to the bank.  If this tax feature had not been extended, the debt would have been taxed by the IRS as income.

State and local sales tax.  Another tax feature that was continued was the election to write off state and local sales taxes in lieu of state income taxes.

Teacher’s supplies. Also, the ability for teachers to deduct class supplies was extended.

Advertisements
Posted in Ch. 4, Tax Planning, Ch. 9, Life and Health Insurance, Ch.11, Investment Basics, Ch.13, Investing In Stocks, Heads Up, Personal Finance In The News, Uncategorized | Tagged , , , , , , , , , ,

The Lifetime Cost of Pets

Teaching Tip:  If you can show the Infographic the “Lifetime Cost of Pets,” you can begin this discussion by asking which students have, or are considering, adopting a pet.  Then ask everyone in class to write down a guess as to what they think the lifetime cost of fish, a rabbit, a cat, and a dog might be.  From there, show the Infographic and let the class discussion begin.

If you’re in college now, chances are that you either have a pet or you’re going to get one.  After all, pets are comforting, and you’re away from home.  And let’s face it, you can probably get one pretty cheap.

There’s no question pets are great, but they come with a lifetime commitment as well as with some serious financial responsibilities.  If you’re like most people, it’s pretty hard towrap your head around the idea of a lifetime commitment let alone to look at a cute little puppy or kitty and see future financial responsibilities.  So what are those financial responsibilities?  If it’s a horse, according to the New York Times article “Animal Lovers, Beware of Ownership Costs,” you are looking at about $42,000 per year, and it doesn’t matter if you paid $500 or $1 million for the horse.  But most students don’t go for a horse, they generally bring home dogs or cats, and on occasion they’ll go for a bird or a tank of fish.  As we learned in Personal Finance Turning Money into Wealth, Principle 6: Waste Not, Want Not – Smart-Spending Matters, you really shouldn’t be buying something, or adopting a pet, when you don’t know the true cost.

The ASCPA provides a financial breakdown of the annual costs of caring for a variety of pets at its Pet Care Costs website.  In addition, Mint.com, using data from the ASCPA, has put together a great Infographic on the “Lifetime Cost of Pets.”

Discussion questions:

  1. Have you ever adopted a pet, if so what kind, and in the process of choosing your pet did you give consideration to the cost of pet ownership?
  2. What do you think the lifetime costs of a cat are?  How about a dog?
Posted in 10 Principles of Personal Finance, Ch. 1, Financial Planning Process, Ch.18, Financial Life Events | Tagged , , , , , , ,

Paying Off Your Debt

Teaching Tip:  “Bridge to Financial Freedom, 7 Steps to Paying Off Your Debt” is a great Infographic and makes a for an excellent class discussion or short lecture.  It can be projected on a screen in class and talked through – there are quite a few interesting facts imbedded in it.  This infographic ties in nicely with the “wrap-up” section of Part 2 “Managing Your Money” in Personal Finance Turning Money into Wealth.  In an effort to tie together the discussion on debt and its consequences Chapter 8 ends with “the six keys to successful debt management.”

There’s no question that we all would like to be debt free, but once you have debt, paying it off is much easier said than done.  Because eliminating your debt involves sacrifice and hard work, not many of us are able to live debt free, but it is possible.

Earlier this year, Jean Chatzky, the financial editor for NBC’s Today Show, published a new book, Money Rules, The Simple Path to Lifelong Security.  This book has more than 90 wealth-building rules like “’More money’, won’t always make you ‘more happy,’” “If you can’t explain it, don’t invest in it,” and “‘Free’ can be very expensive.”  Mint.com took some of those rules outlined by Jean Chatzky and put together an Infographic titled the “Bridge to Financial Freedom, 7 Steps to Paying Off Your Debt.”  It provides a simple step-by-step outline for saving, starting with some very basic advice, Step 1: Spend Less than You Make. Period.

Discussion Questions:

  1. How hard is it for you to spend less than you make? What specific spending item do you have the most trouble controlling?  What expenditure that you currently make on a regular basis would you consider cutting?  Take a look at the Infographic “Bridge to Financial Freedom, 7 Steps to Paying Off Your Debt,” what percent of Americans spend less than they earn?  Be prepared to discuss your opinion with your class.
  2. What do you think the biggest hindrance to successfully implementing this “Bridge to Financial Freedom” is?  Be prepared to discuss you opinion with your class.
Posted in 10 Principles of Personal Finance, Ch. 2, Measuring Financial Health and Making a Plan, Ch. 7, Consumer Loans, Ch.18, Financial Life Events | Tagged , , , , , ,

How Best to Pay Off Your Debt

There’s no question, the logical way to pay off debt is to go after the debt that you pay the most interest on first, and then work down to the accounts with the lowest interest rate.  In spite of the fact that logically this is the best way to chip away at your debt, financial guru Dave Ramsey has long advocated an approach of going after the accounts with the smallest balances first in order to help develop a little confidence and momentum.  Needless to say, with total credit card debt in the U.S. soaring at around $1 trillion and the average credit card debt, per household with credit card debt, at $15,956 according to CreditCard.com, the time has come to find the way to tackle the debt that works best for you.

A recent study titled “Can Small Victories Help Win the War? Evidence from Consumer Debt Management” in the Journal of Marketing Research based upon data from a leading U.S. debt settlement company shows that “closing debt accounts—independent of the dollar balances of the closed accounts—predicted successful debt elimination at any point in the debt settlement program. Indeed, the fraction of debt accounts paid off appeared to be a more powerful predictor of whether the person eliminated his or her debts than the fraction of the total dollar debt paid off, despite the latter being a relatively more objective measure of progress toward the debt elimination goal.”

The New York Times recently discussed these findings in “To Get Out of Debt, It May Help to Think Small.”  As this article notes, for some consumers there is a “snowball effect” if you go after your debt with the smallest balance first rather than the highest interest rate first.  It’s kind of like having a checklist of chores – knocking a couple of them off your list can inspire you to keep working on your list – after all, success tends to breed success.  In Chapters 6 through 8 of Personal Finance, Turning Money into Wealth, we talk about debt, and in Chapter 8, in the section titled “Successful Debt Management” we discuss six keys to successful debt management – and, logically, you would certainly want to tackle the debt you’re paying the most interest on first.  But this new research shows that for some people there may be an intermediate approach that makes the most sense – a combination of a motivational approach and the logical financial approach.  For those who feel overwhelmed by the amount of debt they are facing it might make more sense to go after the debt with the smallest balances first and gain a little momentum.  Then once you have a little confidence, go after the high interest accounts – in effect, use a combination of the two approaches.

Discussion questions:

  1. Which approach do you think would work better for you if you owed $25,000?  Why?  Be prepared to discuss this in class.
  2. Go to the CreditCards.com website and find 3 facts that you find surprising.  What were they and why did you find them surprising? Be prepared to discuss these in class or write a one page paper on them.
  3. Have you or your parents successfully retired debts? What approach was taken?
Posted in Ch. 6, Credit Cards, Ch. 7, Consumer Loans, Ch. 8, Home and Auto, Ch.18, Financial Life Events | Tagged , , , , , , ,

Financial Regrets – A Look at the Biggest Financial Regrets Since 2008

In Chapter 1 of Personal Finance, Turning Money into Wealth we introduce the “Ten Principles of Personal Finance”, and Principle 2 is “Nothing Happens Without a Plan.” While a plan is a necessity, wouldn’t be great if you knew ahead of time where its shortcomings were?  That way, you could make the necessary adjustments and achieve your financial goals more easily.

Ameritrade recently conducted its “Third Quarter Investor Sentiment Survey” that showed that the current economic climate has curbed many investors’ appetites for risk.  It also gave individuals a chance to look back what they’ve done in terms of saving and investing since 2008 and identify what they would have done differently if they had that crystal ball.  When looking at the results of Ameritrade’s “Third Quarter Investor Sentiment Survey,” the top two responses to the question “If you could go back in time before the recession of 2008, what would you have done differently about the way you handled your money?” were:  to live within their means and to spend less and save more.  These results are just about the same as found in a survey done in England and reported in a moneyextra.com website article, “Personal finance regrets for over 35s.”

Discussion Questions:

  1. While it may be somewhat early in your personal finance life, do you have any regrets or things you would change if you had a “do over”?
  2. Has your level of risk regarding your personal financial life changed over the last few years?  Have you even thought about this?
Posted in Ch. 1, Financial Planning Process, Ch.18, Financial Life Events | Tagged ,

College Students and Credit Cards – Some Tips

In a recent article in Time Magazine, “College Students Are Credit Card Dunces,” it was reported that college students really don’t know much about the credit cards they have.  In fact, while 70% of undergrads and 96% of graduate students have credit cards, fewer than 10% pay their balance in full every month.  Moreover, only 15% know what interest rate they are paying on their balance, and fewer than one in 10 students know the late fee and over-limit fee amounts.

In addition, as pointed out in the USA Today article “Tips for college students on credit card use,” credit card use by college students can have a major impact on their credit score – and as you know from Chapter 6 of Personal Finance, Turning Money into Wealth, your credit score has all kinds of financial impacts.  In fact, little things can have a major impact on your credit score.

Class Assignment and Discussion:

  1. Read through the USA Today article “Tips for college students on credit card use.”  What tips did you learn about using your credit card and how it might impact your credit score?  Have you ever made mistakes like these?
  2. If you have a credit card, what do you pay on your credit balance?  What interest rate are you paying on it? What is your late fee? And what is your over-limit fee?  Be prepared to share this with your class.
  3. Consumers Union has some “Credit Card Tips for College Students.”  After look at those tips, what stood out to you as something you might not have thought of?  Be prepared to discuss your answer in class.
Posted in Ch. 6, Credit Cards | Tagged , , , ,

Women Assume More Financial Responsibility, but Lack Confidence

To say the least, the world of personal finance is constantly changing.  There was a time when men largely assumed the responsibilities of personal finance – but today, the financial responsibilities that women take on continue to grow.  Unfortunately, their financial knowledge is not keeping up.  Moreover, as we saw in Chapter 1 of Personal Finance, Turning Money into Wealth, women face unique problems when it comes to achieving financial security. In general, women earn less money, are less likely to have pensions, qualify for less income from Social Security because they generally earn less over their lifetime, and they live longer than men. As a result, planning for their financial independence, in particular during their retirement years, is more difficult for women than it is for men.

Moreover, as reported in the USA Today article, “Women’s financial power grows faster than savvy,” they often lack confidence and tend to rate behind men in understanding financial products and their perceived ability to make financial decisions.  In fact, according to the 2012 Hearts & Wallets survey, women are 42% more likely than men to be concerned about having enough money for retirement; 49% say they are “very inexperienced” with investing vs. 34% of men; and 42% say they are “very uncomfortable” taking on investment risk compared with 28% of men.

Discussion Questions

  1. Take a look at the infographics at the top of the USA Today article “Women’s financial power grows faster than savvy.”  Clicking on the three topics in the upper right hand corner, what fact did you find most unexpected and why?  Be prepared to discuss this in class.
  2. Talk to your parents and grandparents, do you feel that this article accurately portrays how they relate to financial planning?  Be prepared to give examples and discuss these examples in class.
Posted in Ch. 1, Financial Planning Process | Tagged ,