It has been a crazy tax year so far – with the last minute changes by Congress and the IRS scrambling to update their systems. Now that the dust is starting to settle, we need to look forward to the impact of all these changes on your 2013 estimated tax payments.
As you are aware, April 15, 2013, is the due date for the first installment of 2013 estimated tax. The estimated tax rules have been changed for 2013 so that they reach certain new taxes that begin to apply this year. In addition, there are a number of new, changed and expired provisions that could affect your estimated tax computations for 2013.
Here is a brief overview of the changes and how they may affect you.
Individuals who have income that is not subject to withholding (for example, earnings from self-employment, interest, dividends, rents, alimony, etc.) must pay estimated tax or potentially face a penalty. In addition, taxpayers who do not elect voluntary withholding on certain types of income, such as unemployment compensation and the taxable part of social security payments, also may have to pay estimated tax on those items or face a penalty.
For 2013 estimated tax, in general, a taxpayer must pay 25% of a “required annual payment” by April 15, 2013, June 17, 2013, September 16, 2013 and January 15, 2014 to avoid an underpayment penalty. (Yes, the dates are correct – this is the IRS version of quarterly)
The required annual payment for most taxpayers is the lower of 90% of the tax shown on the 2013 return or 100% of the tax shown on the 2012 return, even if filed late (“prior year exception”). However, a taxpayer (other than a farmer or fisherman) whose adjusted gross income (AGI) on his 2012 return is over $150,000 ($75,000 if married filing separately) must pay the lower of 90% of his 2013 tax or 110% of his 2012 tax. These rules are most commonly referred to as “safe estimates” since they eliminate the penalty if the payments are made timely.
There’s no underpayment penalty if the tax shown on the return (after withholding and refundable credits) is less than $1,000. The definition of tax for this purpose has been broadened to reach certain new taxes that begin to apply this year.
A taxpayer who, after Mar. 31, 2013, has a large change in income, deductions, additional taxes, or credits that requires him to start making estimated tax payments should use the annualized income installment method. While the due dates will not change, the payment amounts will vary based on the taxpayer’s income, deductions, additional taxes, and credits for the months ending before each payment due date. As a result, this method may allow the taxpayer to skip or lower the amount due for one or more payments. A taxpayer who uses the annualized method should be sure to file Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts, with his 2013 tax return to indicate to IRS how he has computed his payments, even if no penalty is owed.
In figuring 2013 estimated taxes, individuals should consider the following new items:
- Additional Medicare tax. For tax years beginning after Dec. 31, 2012, a 0.9% Additional Medicare tax applies to Medicare wages, Railroad Retirement Tax Act compensation, and self-employment income over a threshold amount based on the taxpayer’s filing status. An individual may need to include this amount when figuring his estimated tax.
- Tax on net investment income. For tax years beginning after Dec. 31, 2012, an individual may be subject to the Net Investment Income Tax (NIIT). The NIIT is a 3.8% tax on the lesser of net investment income or the excess of the taxpayer’s modified adjusted gross income (MAGI) over the threshold amount. NIIT may need to be included when figuring one’s estimated tax.
- Medical and dental expenses. Beginning Jan. 1, 2013, a taxpayer can deduct only the part of his medical and dental expenses that exceed 10% of his AGI (7.5% if either the taxpayer or his spouse is age 65 or older)
- Limitation on itemized deductions. Beginning in 2013, itemized deductions may be reduced for taxpayers with AGI above $300,000 if married filing jointly or qualifying widow(er), $275,000 if head of household, $250,000 if single, and $150,000 if married filing separately.
In calculating 2013 estimated tax, an individual should also consider the following changed provisions:
- Income limits for excluding education savings bond interest increased. In order to exclude interest, the taxpayer’s MAGI must be less than $89,700 ($139,250 if married filing jointly or a qualifying widow(er))
- Foreign earned income exclusion. The maximum exclusion has increased to $97,600
- Increased standard deductions. The basic and additional standard deduction amounts have increased for 2013.
- Personal exemption amount increased for certain taxpayers. For tax years beginning in 2013, the personal exemption amount is increased to $3,900 for taxpayers with AGI at or below $300,000 if married filing jointly or qualifying widow(er), $275,000 if head of household, $250,000 if single, and $150,000 if married filing separately. The personal exemption amount for taxpayers with AGI above these thresholds may be reduced.
- Alternative minimum tax (AMT) exemption amount increased. The AMT exemption amount is increased to $51,900 ($80,800 if married filing jointly or a qualifying widow(er); $40,400 if married filing separately).
- Certain credits allowed against the AMT. Nonrefundable credits are allowed against AMT.
- Earned income credit. There are increases in the maximum credit, the maximum AGI a taxpayer can have and still get the credit, and the maximum investment income a taxpayer can have and still get the credit
- Standard mileage rates. The rate for business use of a vehicle increased to 56.5¢ a mile. The rate for use of a vehicle to get medical care or move is increased to 24¢ a mile. The rate of 14¢ a mile for charitable use is unchanged.
- Adoption credit and exclusion. Beginning in 2013, the maximum adoption credit will be $12,970 and the credit is not refundable. The maximum amount of adoption assistance that can be excluded from gross income is $12,970. The amount of the credit or excludable assistance begins to phase out for taxpayers with modified AGI in excess of $194,580 and is completely phased out for taxpayers with modified AGI of $234,580.
- Lifetime learning credit. In order to claim a lifetime learning credit, a taxpayer’s modified AGI must be less than $63,000 ($127,000 if married filing jointly)
- Capital gains and dividend rates. For tax year 2013, a taxpayer’s capital gains and dividends rate may depend not only on his taxable income but on his modified adjusted gross income as well.
Also, the rate of social security tax withholding (for employees only) is restored to 6.2% for wage payments made in 2013, up to the social security wage limit of $113,700. There is no change in Medicare. The same increase applies to net earnings from self-employment. The rate will be 12.4%, up to the social security wage limit of $113,700. In addition, the deduction for self-employment tax has been restored to 50%.
If you have any questions regarding your estimated tax payments or the changes to 2013 law, please do not hesitate to contact us.