Annual Adjustments Issued for Retirement Plans, Wage Base and Certain Tax Provisions
As the financial world continues to try and grapple with the uncertainty surrounding taxes and fiscal policy, government agencies are releasing only those annually adjusted amounts that are not affected by potential year-end tax legislation. As a result, most retirement plan amounts and Social Security thresholds for 2013 are available, but few income and estate tax rates have been released.
Social Security Wage Base Moves Higher for 2013
The maximum amount of earnings subject to the Old Age, Survivor and Disability portion of the Social Security taxes will be $113,700 for 2013, up from $110,100 for 2012. The special payroll tax cut for 2012, a two-percent reduction on the employee-share of OASDI, is set to expire at the end of this year. So, for 2013, a 12.4 percent tax is imposed on all earned income up to $113,700.
OASDI is only one of three components of Social Security tax. The other two are the Hospital Insurance (HI or Medicare) and the new Medicare surtax. The HI tax rate rate is 2.9 percent, divided into 1.45 percent employer-share and a 1.45 employee share, for wages earned. Beginning in 2013, a new 0.9 percent Medicare surtax is imposed on earned income above the following thresholds:
- $200,000 for unmarried individuals
- $250,000 combined income for married couples, filing jointly
- $125,000 for a married individual who files a separate return
There is no maximum limit on wages subject to either of these Medicare taxes.
In 2013, Bob Roberts, an unmarried taxpayer, has $250,000 in earned income. His Social Security tax liability will be $21,798.80, determined as follows:
OASDI tax = $113,700 * 0.124 = $14,098.80
HI tax = $250,000 * 0.029 = $7,250
Medicare surtax = ($250,000 - $200,000) * 0.009 = $450
Most Retirement Plan Limits Increase Slightly
Many retirement plan contribution and benefit limits will increase in 2013, as a result of statutorily required cost-of-living adjustments to the base amounts. The 2013 cost of living adjustments (COLAs) affect a variety of retirement savings vehicles, including 401(k) plans, IRAs, SEPs and SIMPLE plans.
In addition to the impact of these COLAs, the increase in the Social Security wage base will have an impact on plans that integrate benefit formulas with Social Security.
If you have opted for a 401(k) plan, then you will be able to make a larger contribution in 2012. Your maximum 401(k) contribution for 2013 is $17,500, up from $17,000 for 2012. The amount that can be contributed to a SIMPLE plan in 2013 increases to $12,000, up from $11,500 in 2012.
IRA Increases. The amount that can be contributed to an IRA in 2013 will increase to $5,500, up from $5,000 in 2012. If you earned too much to contribute the full IRA amount in 2012, you may be able to make a larger deduction in 2013 because there was also an upward adjustment to the deduction phase-out range for individuals who are active participants in an employer-provided plan.
If you are single, the IRA deduction amount will start to phase out when your modified adjusted gross income hits $59,000 and phases out completely at $69,000 for single taxpayers who are active participants in an employer-sponsored retirement plan (up from $58,000 and $68,000 for 2012). For married couples filing a joint return, where the spouse making the IRA contribution is an active participant in an employer-sponsored retirement plan, the income phase-out range is $95,000 to $115,000 (up from $92,000 to $112,000 for 2012).
Defined plans. Defined contribution plans, defined benefits plans, and ESOPs are also affected by the cost of living adjustments. The limitation for defined contribution plans (including SEPs) will increase in 2013 to $51,000, up from $50,000. The maximum amount a defined benefit plan can pay a participant per year increases to $205,000 in 2013, up $5,000 from the 2012 payment limit.
The amount for determining the maximum ESOP account subject to a five-year distribution period increases from $1,015,000 for 2012 to $1,035,000 in 2013. In addition, the maximum compensation amounts increase to $255,000 (and $115,000 for "highly compensated" employees.) As a result, the amount that an employee can save under one of these tax-qualified plans will increase.
Catch-up contributions. Eligible individuals who are age 50 or older can contribute an additional amount to IRAs, 401(k)s and SEPs each year. The amounts allowed for these catch-up contributions were not changed for 2013. As a result, the catch-up amount for IRAs remains at $1,000 and the catch-up amount for 401(k)s and SEPs remains at $5,500.
IRS Releases Some 2013 Amounts, But Waits For Congress on Others
The IRS has issued some of the dozens of cost of living adjustments (COLAs) required for various provisions in the Tax Code for 2013. However, in order to avoid wholesale confusion among taxpayers and tax practitioners alike, the IRS did not release inflation-adjusted amounts for provisions (such at the tax brackets) slated to expire at the end of 2012.
The IRS has not given any indication regarding when the remainder of the annually adjusted amounts will be released. The following provisions are likely to be of interest to the small business owner.
"Kiddie tax." The amount used to reduce the net earned income reported on a child's return subject to the "kiddie tax" increases to $1,000, up from its 2012 level of $950. The same $1,000 amount is used to determine if a parent can elect to include a child's gross income in the parent's income and to calculate the "kiddie tax." The IRS also announced that the AMT exemption amount for a child subject to the "kiddie tax" is $7,150 for 2013.
The regular AMT exemption amount itself applicable to all individuals, however, must still be resolved by Congress for 2012, as well as for 2013. Without Congressional action, the regular exemption amount will drop substantially.
Gift tax annual exclusion. The gift tax annual exclusion increases to $14,000 for 2013, up from $13,000 for 2012. The exclusion for gifts to a spouse who is not a citizen of the United States increases from $139,000 for 2012 to $143,000 for 2013.
Congress has yet to resolve the extent to which there will be a gift tax in 2013. The lifetime exclusion will drop to $1 million if no Congressional action is taken.
Savings bond education exclusion. The exclusion for taxpayers who pay qualified higher education expenses begins to phase out for modified adjusted gross income (MAGI) above $112,050 (joint filers) and $74,700 for all other returns. The exclusion phases out for taxpayers with MAGI at a level of $142,050 (joint filers) and $89,700 for all other returns. Medical savings accounts.
For 2013, a medical savings account (MSA) must be paired with a health plan with a deductible between $2,150 and $3,200 (or between $4,300 and $6,450 for family coverage) and a maximum annual out-of-pocket amount of $4,300 for individual coverage ($7,850 for family coverage).
Long-term medical care premiums. Beginning in 2013, the following amounts paid as premiums for long-term medical care insurance are considered deductible medical care expenses:
|Long-term Care Premiums 2013 |
|Attained Age Before |
Close of Tax Year
|Limit on Premiums |
for Medical Expense Deduction
|40 or less ||$360 |
|More than 40 but Not More than 50 ||$680 |
|More than 50 but Not More than 60 ||$1,360 |
|More than 60 but Not More than 70 ||$3,640 |
|More than 70 ||$4,550 |
Foreign earned income exclusion. The foreign earned income exclusion amount is $97,600 for 2013.