Some high-earning individuals were surprised when they got their 2013 Individual Income Tax Return. They paid more taxes in 2013 than they did on the same income in 2012.
Several different tax laws caused the higher federal income taxes.
The itemized deductions on Schedule A of form 1040 were reduced if single individuals had more than $250,000 of total income. Even their home mortgage interest and charitable deductions were reduced to less than they paid. Married couples saw the “phase down” of itemized deductions if their total income was $300,000 or more.
The reduction only reduced the total itemized deductions to 80 percent of what was paid, not a reduction to zero.
Those with long-term capital gains had an increase in the tax rate from 15 percent to 20 percent if the married couple had Adjusted Gross Income of more than $450,000. Individuals with AGI of more than $400,000 had the same tax rate increase on long term capital gains.
If the married couple had both more than $250,000 AGI and some of the income was passive (interest, dividends, long term capital gains, etc) then the new 3.8 percent additional Medicare tax on the investment income was added to their regular income tax.
The top income tax rate (bracket) increased from 35 percent to 39.6 percent if the couple had taxable income of more than $450,000. The same rate increase was for individuals with gross income of more than $400,000.
For all folks under 65 years old, the medical expenses on Schedule A were reduced by 10 percent of AGI. But for those age 65 or older, only a 7.5 percent reduction applied.
The $3,900 personal exemptions were phased out once the AGI for married folks was more than $300,000. Individuals suffered the phase out when their AGI was more than $250,000.
The Alternative Minimum Tax continues to raise a lot of money. President and Mrs. Obama paid $95,000 or so in Alternative Minimum Tax in 2013.
At least Nevada citizens do not pay a state income tax unless they earned income in another state like California. Even Nevada citizens pay California Nonresident Individual Income Tax on wages or other income earned inside the state of California or other states that have a state income tax (most states do have it).
However, if you earned a pension working in California years ago and are now Nevada citizens, you do not have to pay a California state income tax on your pension income.
Did you hear? “Failure is not permanent and neither is success,” Michael Altshuler.
John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs.