In 2012, the highest income tax rate (U.S./California blended tax rate) was 42.99%: Federal tax rate: 35%; California tax rate: 12.3%.
In 2013, the highest income tax rate is 51.7% (Federal tax rate: 44.3%, California tax rate: 13.3%; the 51.7% tax rate applies to wage earners). For investors the top rate on net investment income is 50.92% (Federal tax rate: 43.4%, California tax rate: 13.37%) (A 20% tax increase over 2012).
The top tax rates apply to U.S. taxpayers who earn income over certain levels, see below. These top tax rates apply to international investors who are classified as U.S. tax residents under either the “Green Card Test” or the “Substantial Presence Test”.
2013 Income Taxes (U.S./California)
1. California Income Tax
Income over $250,000 is taxed at 12.3%. Income over $1m is taxed at 13.3% (additional 1% mental health tax). These tax rates apply through 2018.
2013/Highest California Tax Rate: 13.3%
2. U.S. Income Tax (2013)
Individuals (over $400,000), Heads of Household
(over $425,000); Marrieds (over $450,000) Tax: 39.6%
Net Investment Income
Individuals/Heads of Household
(Modified Adjusted Gross Income (“AGI”) over $200,000)
Married Taxpayers (over $250,000)
Married filing separately (over $125,000) Tax: 3.8%
The 3.8% Medicare surtax on net investment income is levied on the lesser of:
1. Taxpayer’s net investment income; or
2. The excess of modified adjusted gross income over the applicable dollar threshold (modified AGI is AGI plus any tax-free foreign earned income).
Investment income includes: interest, dividends, capital gains, annuities, royalties and passive rental income. Tax-free interest is exempted, along with pay-outs from retirement plans such as 401(k)s, IRAs, deferred pay plans and pension plans.
(Wages and Self-Employment Income)
Individuals/Heads of Household
(Total Earnings over $200,000)
Joint Returns/Earnings over $250,000
Filing Separately/Earnings over $125,000 Tax: 0.9%
This surtax applies only to the employee’s share of Medicare tax. Employers don’t owe it. Employers will withhold the surtax once an employee’s wages exceed $200,000. Employees will then calculate the actual tax due on their Form 1040 tax returns.
2013/Highest U.S. Tax Rate: 44.3%
(Includes Medicare Surtaxes on Net Investment Income and Earned Income)
Summary 2013/Combined U.S./California Tax (Top Rates): 57.6%
“Blended” U.S./California Tax (Top Rates): 51.7%
For taxpayers (individual) who have income over $400,000, including net investment income over $200,000 (modified adjusted gross income), and earned income over $200,000 (wages and self-employment income), the combined top tax rate is 57.6%, the “blended” top tax rate is 51.7%.
For investors (who do not have wages and self-employment income) the combined top tax rate is 56.7%; the “blended” top tax rate is 50.92%.
In addition, taxpayer wages of $113,700 (maximum Social Security wage base/2013) are subject to an additional $8,698 in “payroll tax”, paid by taxpayer (who is an employee or self-employed), calculated as 7.65% of $113,700 (which includes 6.2% Social Security (FICA) tax, 1.45% Medicare tax).
Income – Additional Tax Issues (2013)
The top tax rate on capital gains and dividends rises to 20% for high income taxpayers (singles with taxable income above $400,000 and couples over $450,000). The 3.8% Medicare surtax on net investment income can boost the rate to 23.8%. For other taxpayers, a 15% tax rate applies but filers in the 10% or 15% tax bracket can still qualify for the special 0% tax rate.
In 2013, AMT exemptions increase to $80,750 for couples (up from 2012 by $2,000) and $51,900 for singles (up from 2012 by $1,300). AMT exemptions automatically increase in future years based on the rate of inflation. Personal tax credits (e.g. for tuition and dependent care) will continue to offset alternative minimum tax liability.
Itemized Deductions (Personal Exemptions)
High-incomers resume losing some of their itemized deductions for 2013 (and personal exemptions of $3,900/2013). Itemized deductions are reduced by 3% of the excess of AGI over $250,000 for singles, $275,000 for household heads, and $300,000 for marrieds. The total reduction can’t exceed 80% of itemizations. The following expenses are exempted: medical expenses, investment interest, casualty losses and gambling losses (to the extent of winnings).
The personal exemption ($3,900) is phased out for high-incomers, cut by 2% for each $2,500 of AGI over the same threshholds for the itemized deduction phase-out.
Taxpayers Working Abroad
In 2013, U.S. taxpayers working abroad have a larger income exclusion: $97,600.
Home Mortgage Debt
The income tax exclusion of up to $2m of forgiven home mortgage debt was revived for 2013.
2013 Estate and Gift Tax
For 2013, the estate and gift tax exemption increases to $5,250,000, the tax rate rises to 40% (from 35% in 2012).
The annual gift tax exclusion rises to $14,000 per donee. In addition:
1. The portability of the estate tax exemption between spouses has been revived;
2. Up to $1,070,000 of farm or business realty can receive discount estate tax valuation;
3. If one or more closely-held businesses make up greater than 35% of an estate, as much as $572,000 of tax can be deferred and the IRS will charge only 2% interest.
1. Maximum 401(k) contribution is $17,500;
2. The Fixed Contribution Plan maximum contribution is $51,000 (based on up to $255,000 of compensation);
3. Defined Benefit Plan limitation is $205,000.
1. 50% Bonus depreciation stays in effect for assets placed in use in 2013.
2. $500,000 in business assets can be expended (reduced dollar for dollar after more than $2m of assets are put in service).
3. 100% gain exclusion for investors who buy stock in a small regular corporation directly from the company and sell more than 5 years later.