This week the Fed announced that they will continue to maintain their current pace of quantitative easing at this time. Economic data points to some slowing in growth including an employment report showing 130,000 private sector jobs were created in October which was below the estimated 150,000. While indications were that the economy is still improving overall, officials would like to see more evidence that growth can be sustainable before pulling back.
As we flip the calendar to November now is a good time to start thinking about ways to utilize the retirement vehicles available to us and methods to minimize exposure to new taxes for the year. 2013 is the first year that two provisions of the Affordable Care Act go into effect for taxpayers above certain income limits: this includes the new 3.8% Medicare surtax on unearned income and the 0.9% Hospital Insurance (HI) tax on earned income. The 3.8% surtax is imposed upon the lesser of: the net investment income (dividends, interest, capital gains, rent, etc.) or the excess of modified adjusted gross income (MAGI) over $200,000 for individuals and $250,000 for married joint filers. Additional taxes may also be due for those with AGI above $200,000 for individuals and $250,000 for married filing jointly as the 0.9% Medicare surtax on earned income is also applicable starting in 2013. For example, as this is applied towards total household income, a family with $300,000 of total earned income will owe an additional $450 in 2013 due to this tax. However if both taxpayers earn $150,000 in this situation their respective employers will not withhold the additional taxes for Medicare to account for this new tax as neither made more than $200,000. On the flipside, if a married taxpayer earns $225,000 but their spouse does not work they will have paid in too much for this Medicare tax as total household income was below $250,000 yet employers will apply the additional tax when an individual earns over $200,000. In this instance they will receive a credit towards taxes on their tax return.
With that in mind there are some general ways to help reduce exposure to these additional taxes while also taking advantage of various vehicles to help save towards retirement and other financial goals:
- Gains and losses – Consider any realized gains and losses for the year and whether it is beneficial to offset gains by taking available losses in nonqualified accounts. For most taxpayers you can offset realized gains and up to $3,000 of ordinary income per year by realizing capital losses. This is especially beneficial for those in the highest tax bracket where short-term realized gains could be taxed at a rate as high as 43.4%.
- Retirement plans such as 401(k), 403(b),etc. – If your budget allows for it, consider maxing out your contributions to your retirement plan. For 2013 the limit is $17,500 with an additional $5,500 for those over the age of 50. If you are not able to contribute the max be sure to consider contributing enough to take advantage of any match your company provides on employee contributions. You have until end of the year to make these contributions.
- IRA contributions – Various rules determine whether an IRA contribution is tax deductible. However the new 3.8% surtax on investment income may make even non-deductible IRA contributions appealing for high income earners. These contributions are made after-tax and gains grow tax-deferred. While annual IRA contribution amounts are limited ($5,500 a year with $1,000 catch up for those over 50), if you anticipate being in a lower tax bracket when you begin to take IRA distributions this could be a beneficial planning strategy to avoid the surtax in the meanwhile. You can make contributions for the 2013 tax year up until the due date of your income tax return (not including extensions).
- Education expenses – For those with children or grandchildren with college tuition expenses now or in the future, a 529 Plan may be a good vehicle to use. These plans provide an opportunity to setup an account that offers possible tax deferred growth and qualified withdrawals can be made income tax free. Missouri allows a tax deduction on contributions up to certain limits on your states tax return.
- Health Savings Accounts (HSAs) – For those with these types of health insurance policies the annual deductible contribution limit for 2013 is $3,250 for individuals and $6,450 for families. If a family member is over the age of 55 an additional $1,000 is allowed.
2014 IRS Retirement Plan Figures Announced
Below is a summary of some pension plan contribution limits for 2014 tax year. Because the consumer price index (CPI) did not meet certain thresholds there are few changes in the amount of annual contribution limits for 2014, but we will see adjustments in income phase-out ranges.
- Taxpayers will again be able to contribute $17,500 in elective deferrals towards 401(k), 403(b), and 457 plans for 2014. The catch-up provision for those over the age of 50 who participate in these plans is again $5,500.
- The annual limit on IRA contributions is again $5,500 with a $1,000 catch up provision for those over age 50. The income eligibility for Roth IRA contributions is phased out between $114,000 – $129,000 for individuals and $181,000 – $191,000 for married couples.
- The limitation on annual benefit for defined benefit plans increases to $210,000 in 2014 from $205,000 in 2013.
- The limitation for defined contribution plans is $52,000 for 2014 up from $51,000 in 2013.
- Health Savings Accounts (HSAs) deductible contribution limits increase to $3,300 for individuals and $6,550 for families with a $1,000 catch-up if a member is over 55.
This week the Social Security Administration announced their cost-of-living adjustments (COLA) for 2014. Benefits will increase 1.5 percent starting in 2014 whereas Medicare Part B premiums will stay the same. The Social Security wage base for workers increases from $113,000 in 2013 to $117,000 in 2014.