A variety of numbers that are important for 2013 tax planning were recently released by the Internal Revenue Service and Social Security Administration.
First, let’s talk retirement accounts. In 2013, maximum 401(k) contributions from your own paycheck will be capped at $17,500 for the year, an increase of $500 over 2012. For folks 50 and older, the “catch-up” limit remains the same, at $5,500. Personal IRA contributions will be limited to $5,500 for those under 50, and $6,500 for those age 50 and older. For SIMPLE accounts, the maximum contribution increases to $12,000, with a $2,500 catch-up limit for those 50 and over.
While elimination of the Social Security taxable wage limit is one of the proposals on the table in Washington, D.C., the inflation adjusted cap for 2013 is currently slated to be $113,700, up from $110,100 for 2012. This is the maximum salary level per year per person on which Social Security taxes are charged. Your wages above that amount are not subject to that particular tax. Expect this to be a hotly debated item during the next Congressional session.
Also on the Social Security front, retirees that have not yet reached full retirement age for their birthdate can earn up to $15,120 in 2013 from employment without losing any Social Security benefits.
If you provide cash gifts to others, you’re in luck in 2013: The annual gift tax exclusion has increased to $14,000 for 2013. Do note, however, that this is als a hotly contested item, and may be on the retroactive chopping block for 2013.
Lastly, Health Savings Account (HSA) contribution limits will increase to $3,250 for individuals and $6,450 for families next year.
In case you didn’t notice, the makeup of Congress and the White House had zero significant change in this year’s election. The Obama Administration may see some slight personnel changes, but control of the House remains with the GOP and the Senate with the Democrats, with only a few new faces coming in. Neither party, in neither house, saw a significant turnover in elected representatives as many had predicted.
Given this, and the pending fiscal cliff, I am advising clients to take full advantage of every tax break they can for 2012. Sometimes, it is best to defer certain taxable actions until the following year. However, given the likely continued gridlock in Washington, I personally predict that 2013 will be a very bad year in regards to tax deductions and tax credits that many take for granted.
If you have capital gains items that you can lock in your profits on now, and pay the current reduced tax rate on, I would encourage you to take your profits now and pay the tax in 2012. Similarly, if you have been considering deferring compensation, I would generally advise against it, as the Obama Administration and Senate Democrats are serious about pushing through higher marginal tax rates. I would also encourage you to take any green energy tax credits and education tax breaks that you can in 2012, as they probably won’t exist in 2013.
Looking into the magic 8-ball, I also anticipate reduced limits on charitable contributions and the home mortgage interest deduction. In fact, many Congress-critters want to eliminate the home mortgage interest deduction entirely, or at least implement a drastic phaseout. You should also be prepared for greater Alternative Minimum Tax (AMT) hits, even for those earning less than $75,000 per year. Also be ready for a higher AGI threshold for deducting medical expenses, and look for little things like the $250 deduction for teachers spending their own money on classroom supplies to go away.
In my opinion, 2013 is set to be one of the most “interesting” years in the field of U.S. tax regulation since 1986, when the entire tax code received a major overhaul. While I say “interesting” as a tax practitioner from an academic standpoint, that can be translated to “very, very bad” for most middle and upper income taxpayers. I expect that anybody earning more than about $35k or $40k per year will feel the effects of 2013 tax law changes directly in the wallet, despite political rhetoric to the contrary.
And just for the record, I would be writing these exact same words even if Romney had been elected and the GOP had taken control of the Senate. I belong to no political party, and support none. The current U.S. national debt is over $16 trillion, and increased by $1.1 trillion in FY 2011-12. In the first full month of FY 2012-13, which was the month of October, the Federal government already had to go another $200 billion in the hole.
Currently, mandatory spending (which includes interest payments on the debt and legally obligated entitlement programs), accounts for more monthly and annual spending than the U.S. government takes in. In other words, all Federal discretionary spending (which includes defense, education, etc.) is all on borrowed money. The only way to fix the problem is to take in more tax revenue and legislatively change the underlying laws that dictate mandatory spending.
Therefore, it is a mathematical impossibility for any administration, no matter which party is in charge, to both cut taxes and balance the budget. It’s very basic arithmetic, it simply can’t happen. To get anywhere near close to a balanced budget, social programs will require deep cuts in benefits, tax rates must increase, and tax credits and deductions must go away. All three of these moves basically require political suicide on the part of all Federal branches, in both parties.
Therefore, it’s not going to happen, and I anticipate that the next two years until the next Congressional election cycle will simply yield more gridlock, increasing debts, occasional Federal government shutdowns, continued quantitative easing (printing of money by the Treasury, which decreases the value of the dollar), more mudslinging and blame, and everything else we’ve been seeing for the last two years.
Unfortunately, that means many tax breaks will go away — and all of us will have to pay the price. Expect your tax burden to increase in 2013, simply by Congress NOT acting, and plan accordingly.