Check out the 2015-2016 Tax Facts section for tables for rates and deductions.
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The American Taxpayer Relief Act of 2012 had some serious ramifications for
high-income earners. Are you a "high-income earner"?
You are if your adjusted gross income (the amount on the last line of page 1
of Form 1040) exceeds a certain income threshold, you will see quite an
uptick in your tax bill in your 2015 return.
The stated 2015 income thresholds:
• Single Filers AGI more than $258,250 annually
• Married Filing Jointly Filers AGI more than $309,900 combined
• Married Filing Separately Filers AGI more than $156,000
• Head of Household Filers AGI more than $284,450.
1. Limit on Itemized Deductions
These deductions will be capped for those people going over the income threshold:
• Mortgage Interest
• State Income Tax
• Property Tax
• Charitable Donations
The limitation does not apply to:
• Deductible Medical Expenses
• Investment Interest Deductions
• Casualty and Theft Losses
• Gambling Losses
The limitation reduces the affected deductions by subtracting 3% of the amount your
income goes over the income threshold mentioned above.
| Example #1: John makes $325,000 annually. He is a single filer. His income is therefore $66,750 over the income threshold. He will have to reduce the affected deductions by $2003 ($66,750 x 3%). |
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Example #2: Joe and Niki make $355,000 annually when combining both their incomes. They're $45,100 over the income threshold. Therefore, they will have to reduce their affected deductions by $1353 ($45,100 x 3%). |
2. Personal Exemptions Phased Out
In addition to their itemized or standard deductions, most taxpayers can count on subtracting from their taxable income an exemption for each person listed on the return (taxpayer, spouse, and dependents). In 2015, that personal exemption is $4000 per person.
For high-income earners, however, each exemption will be lowered by 2% for every $2500 that the income is over the threshold mentioned above. If you're over the threshold, and you claim exemptions for yourself, your wife, and two kids, you would have to lower all four exemptions.
| Example #1: John, our single filer from the previous section, is $67,750 over the income threshold. $66,750 divided by $2500 = 26.7. Two percent of his personal exemption is $80 ($4000 x 2%) He will have to lower his exemption write-off by $2136 ($80 x 26.7). |
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Example #2: Joe and Niki also have some adjustments. They're $45,100 over the limit. $45,100 divided by $2500 = 18.04. They will have to lower EACH of their personal exemptions by $1443 ($80 x 18.04). |
Possible Strategies:
• Because married-filing-jointly filers will hit the limit much sooner, proportionately,
than single filers, it might make sense to file married-filing separately to split your
income...especially if one person of the couple makes much more than the other.
• The phase-outs are triggered by adjusted gross income. If you find that you will be
close to one of the phase-out thresholds, consider selling loser stocks to lower your
overall income.
• If you own your own business, consider a large capital purchase prior to year's end
to take advantage of the Section 179 Expense write-off.
• Lower adjusted gross income by maximizing pre-tax pull-outs from your earnings
(retirement plans, health plans, dependent care plans, savings).
3. Medicare Surtax
Those of you in this high-income bracket have probably already felt the effects of the Medicare surtax in your paychecks. Most wage earners pay 1.45% of their pay into Medicare taxes. In 2013, however, once wages cross the thresholds mentioned in the beginning of this section, the employer is obligated to withhold an extra .09% to pay towards the Medicare surtax.
In addition, high-income taxpayers face a 3.8% surtax on either their net investment income (interest, dividends, capital gains) or the amount by which their income is over the all-important thresholds...whichever is the higher amount.
| Example #1: Let's go back to Joe and Niki, from our previous examples. Remember that they made $355,000 annually; we'll suppose that $310,000 came from wages and $45,000 from net investment income. Their modified adjusted gross income is $45,100 over the limit, which is higher than their net investment income. So their additional tax liability, thanks to the Medicare surtax, will be $1714 (3.8% x $45,100). |
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Example #2: Now suppose that their $355,000 comes from $290,000 in wages and $65,000 in net investment income. In this case, their investment income of $65,000 is higher than the amount ($45,100) that they are over the income threshold. Now their Medicare surtax would be $2470 (3.8% x $65,000). |
4. Higher Capital Gains Tax Rate
Taxpayers in the 39.6% tax bracket (with an adjusted gross income of over $413,200 or $464,851 if married) will now pay 20% on their long-term capital gains and their qualified dividends. This is up from the previous rate of 15%.
Possible Strategies:
• Consider moving investments into tax-exempt vehicles, such as municipal bonds, to
avoid the Medicare investment tax.
• Take advantage of tax deferral mechanisms such as the Section 1031 exchange or
the installment sale method to minimize the Medicare tax.
• Sell loser stocks to offset capital gains and other investment income.
