Although the Internal Revenue Service had to omit some major tax provisions from its inflation adjustment announcement last week, around two dozen items had their amounts bumped up for next year.
Here are some of the more widely used individual tax provision amounts that will change in 2013.
Kiddie tax: Although this moniker may sound like it’s a tax break for youngsters, sort of the child’s menu of the tax code if you will, the kiddie tax actually could cost you more.
Officially known as the Unearned Income of Minor Children Taxed as if Parent’s Income Tax, it requires, as per its name, that a child’s investment earnings exceeding a certain amount be taxed at their parents’ usually higher tax rate.
The kiddie tax was created in 1986 to prevent parents from putting money into investment accounts held in the names of their lower-taxed children.
Basically, a portion of the kids’ earnings remain tax free, with another chunk of investment income being taxed at the kiddies’ tax rate.
But when the earnings exceed the combination of the tax-free and low-tax amounts, then their parents’ tax rate kicks in. The earnings affected by the kiddie tax are reviewed each year for possible inflation bumps.
For 2013, parents will have to deal with the kiddie tax when a youngster’s investment earnings exceed $2,000. That’s $1,000 tax-free for your little angel and $1,000 at the youth’s tax rate. The 2013 amount is $50 more than the $950 allowed for both a child’s unearned income categories this year.
Gift tax exclusion: A simple way to reduce an estate’s taxable value is to give some of it away before you pass away.
Not only will this assist you in getting your estate below the taxable threshold, which is still up in the air for next year since the current estate tax law expires on Dec. 31 and Congress could make changes before or by (or even after) then, but this exclusion also allows you to receive the thanks of your grateful recipients. Double win!
In 2012 you can give up to $13,000 to as many separate individuals — and they don’t have to be your family (hint, hint) — as you want without any tax implications for you or the people to whom you give the money.
In 2013, you’ll be able to reduce your taxable estate by giving away $14,000 per person.
Deductible long-term care premiums: In 2013, you’ll need more medical expenses — 10 percent of your adjusted gross income instead of the current 7.5 percent — before you can claim them on Schedule A.
To help you reach the medical deductions threshold, you can include the deductible portion of eligible long-term-care insurance premiums. These amounts are based on your age and are adjusted annually for inflation. For 2013 they are:
Foreign tax provisions: Several inflation-affected tax areas involve foreign considerations. They include:
- The amount of foreign earned income that taxpayers working abroad can exclude increases from $95,100 in 2012 to $97,600 in 2013.
- The first $143,000 of gifts in 2013 to a spouse who is not a U.S. citizen will not be included in taxable gifts. That’s $4,000 more than allowed this year.
- A U.S. person receiving aggregate foreign gifts exceeding $15,102 in 2013 will be required to file an information return. That’s $379 than in 2012.
Tax expatriates also will see some inflation adjustments in 2013.
An individual next year is treated as leaving the United States primarily to avoid tax if his or her “average annual net income tax” is more than $155,000 for the five taxable years ending before the date that person gives up U.S. citizenship.
Expatriates also face an exit tax when they give up their citizenship. In 2012, that tax can be avoided if the person’s deemed sale asset value is less than $651,000. In 2013, that value to avoid the expatriation tax goes to $668,000.
You can check out the other tax laws with 2013 inflation adjustments in Rev. Proc. 2012-41. And stay tuned for the IRS’ final word on the areas where it’s waiting for Congressional action.
JDKatz, P.C. is a full-service law firm focused on tax law and estate planning. We are dedicated to minimizing your existing liability and risks while providing valuable tax planning to streamline your tax issues in the future. Please call us at 301-913-2948 to schedule an appointment to meet with one of our trusted attorneys.