The purpose of this newsletter is to bring you up to date on changes to California and Federal tax law.
CALIFORNIA
Proposition 30 adds additional income tax rates retroactive to January 1, 2012. If you are affected by this provision, the proposition also contains a waiver of underpayment penalties for this retroactive assessment.
If your California taxable income for 2012 is less than $250,000 ($500,000 for a married couple filing jointly) you are not affected by the increased rates. The marginal rates for all taxpayers up to the previous highest rate of 9.3% were not changed by Prop. 30. If your California taxable income for 2012 is over the $250,000/$500,000 thresholds, marginal rates on income over those amounts will be –
Rate Single MFJ Head of Household
10.3% $250,000 $500,000 $340,000
11.3% $300,000 $600,000 $408,000
12.3% $500,000 $1,000,000 $680,000
Proposition 30 also increased the statewide sales tax rate by ¼% effective January 1, 2013.
FEDERAL
I’m writing this on December 21, so any of the following is subject to change by Washington, but this is what we know now.
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The gift exclusion remains at $13,000 for 2012 but increases to $14,000 for 2013.
The election to deduct sales tax in lieu of state income tax expired 12/31/11.
The option to deduct tuition instead of using a tuition credit expired 12/31/11. The credit is still available for 2012 for Singles with adjusted gross income up to $90,000 and married couples with adjusted gross income up to $180,000. For 2013 the available tuition credits will be available to Singles with adjust gross income up to $63,000 and married couples with adjusted gross income up to $127,000.
The $250 deduction available to all classroom teachers (whether or not they itemized) expired 12/31/11. Teachers who itemize can continue to deduct qualifying employee expenses.
Effective 2013 FICA tax will go up for some. FICA is made up of two parts – social security (6.2%) and Medicare (1.45%). Effective 1/1/13 the Medicare portion will increase to 2.35% for a Single person with earnings over $200,000 and married couples with combined earnings over $250,000. Earnings are wages or net self-employment income. Employers will withhold this extra on employees earning over $200,000. Any balancing of this amount will be reconciled on the 1040 at year end.
Also effective 1/1/13 is a 3.8% Medicare tax on the lesser of net investment income or modified adjusted gross income in excess of $250,000 (married couples) or $200,000 (singles). Rather than try to explain this here, I will review your individual situation with you.
Effective 1/1/13 medical expenses in excess of 10% of adjusted gross income are deductible. Previously this threshold was 7.5% of adjusted gross income.
Maximum IRA contributions increase to $5500 for 2013 (plus $1000 for those over 50).
Effective 1/1/13 capital gains rates increase from 0% to 10% for those in the 10% and 15% tax brackets. They increase from 15% to 20% for those in the 25% tax bracket and above.
