2013 Income, Estate, & Gift Taxes Ag Econ Current Issues May 14, 2013 J C. Hobbs - Assistant Extension Specialist OSU Department of Agricultural Economics

2013 In 2013, most households will see the highest income tax burden since 2008.

2013 Income Tax Rates 2013 and future rates are to be: 10, 15, 25, 28, 33, 35, and 39.6 percent. (a 3.8% surtax will impact high income taxpayers) The 39.6% rate applies to: –Single Filers with Taxable Income > $400,000 –Married Filing Joint with TI > $450,000 –Married Filing Separate with TI > $225,000 –Head of Household Filers with TI > $425,000.

Capital Gain Rates Capital gains for 2013 –Net capital gain is taxed at the 0% rate for taxpayers in the 10% and 15% income tax brackets. –Net capital gain is taxed at the 15% rate for taxpayers in the 25%, 28%, 33%, and 35% income tax brackets. –Net capital gain is taxed at the 20% rate (plus a 3.8% surtax from Obamacare) for taxpayers in the 39.6% income tax bracket.

Dividends Qualified dividend rates for 2013 –Qualified dividends are taxed at the 0% rate for taxpayers in the 10% and 15% income tax brackets. –Qualified dividends are taxed at the 15% rate for taxpayers in the 25%, 28%, 33%, and 35% income tax brackets. –Qualified dividends are taxed at the 20% rate (plus a 3.8% surtax from Obamacare) for taxpayers in the 39.6% income tax bracket.

Self Employment and Social Security Taxes For 2012: Self-employment tax – a 2% reduction in social security taxes (FICA) from 12.4% to 10.4% or a payroll tax reduction for the employee share of social security taxes (FICA) from 6.2% to 4.2%. For 2013: Back to 12.4% for self-employed individuals and 6.2% for employees. (roughly a decrease in take home pay by $100 per month)

Section 179 Expensing 2013 is $500,000 with a $2,000,000 investment limit. Purchased capital assets that are depreciable (new or used). Must not create a loss (any amount that is not used due to the taxable income limit may be carried forward to future years).

Section 179 Expense Election Purchased capital assets that are depreciable under MACRS deprecation rules. Property generally must be used in a trade or business. Farm machinery and equipment; draft, breeding, or dairy livestock; grain storage facility; single purpose livestock or horticultural structures; and field tile all qualify for the Section 179 expensing.

Section 179 Expense Election General-purpose farm buildings, such as machinery sheds or hay barns, are not eligible for Section 179 expensing. The amount expensed is treated the same as depreciation and is subject to recapture when the asset is sold.

Additional First-Year Depreciation 2013: 50% Additional First-Year Depreciation is allowed for qualifying property placed in service through 12/31/2013. Property must have a depreciable life of 20 years or less. Original use must occur with the taxpayer claiming the deduction (in other words - new property). Expires January 1, 2014

What is New Property? Never placed in service by anyone else other than the current owner (original use by the taxpayer) New Cow - original use applies to the owner when she has her first calf. New Bull - original use applies to the owner when he is first used as a sire.

Medicare Tax on Unearned Income begins Jan. 1, 2013 New Medicare Tax on unearned income at 3.8% rate if modified adjusted gross income exceeds $250,000 for married filing joint or $200,000 all others. Net investment income - applies to interest, dividends, annuities, royalties and rent (unless it is from business activities). Net income from the sale of capital investments including stock and real estate (unless it is from the sale of business property).

Medicare Tax on Unearned Income (cont.) Unearned income does not include distributions from qualified retirement plans. Rule does not apply to the exclusion allowed on the sale of a principal residence of $250,000 for individuals or $500,000 on a joint return.

Medicare Tax on Earned Income after Jan. 1, 2013 New Medicare Tax on earned income at 0.9% on wages and self-employment exceeding $250,000 for joint returns and surviving spouses or $200,000 single filers and all others. Applies only to the employees share of the Medicare tax ( not the employers) and to self-employment income.

Personal Exemption & Itemized Deduction Phase-outs for 2013 Phase-out based on Adj. Gross Income – joint filers = $300,000 – single filers = $250,000 – head of household = $275,000 – married filing separate = $150,000

Personal Exemptions The personal exemption amount is reduced 2% for every $2,500 that your Adjusted Gross Income exceeds the threshold amount.

Itemized Deductions Up to 80% of itemized deductions for higher income taxpayers will be subject to a 3% phase-out (“Pease limitations”) The phase-out does not affect the deductible amount of medical expenses, investment interest, casualty or theft losses, and gambling losses

Itemized Medical Expenses Itemized deduction floor for medical expenses will rise to 10% of AGI for taxpayers under age 65 During 2013 through 2016, the floor remains at 7.5% for taxpayers who are 65 years of age or older.

Alternative Minimum Tax Finally Fixed the Exemption issue (no need for an annual AMT patch to be passed by Congress) and beyond the exemption amount will be indexed for inflation.

Estate Taxes Rates: –2013 maximum rate is 40 percent Exemption amount: –2013 exemption amount is $5.25 million –Indexed for inflation

Estate Taxes Portability between spouses made permanent –Husband and wife can transfer $10.5 million of assets free of estate taxation. –The unused estate tax exemption ($5.25 million) can be transferred from the deceased spouse and thus can be used by the surviving spouse when he/she passes.

Example of Portability Husband passed in 2010 and the value of the estate was $2.0 million. The exemption was $3.5 million, so an unused amount of $1.5 million was left from the husband that the wife can use later. In 2013, the wife passes and the fair market value of the estate is now $6.0 million, she can use her $5.25 million exemption plus up to $1.5 million (a total of $6.75 million) which was not used when her husband passed, thus avoiding estate tax completely.

Gift Taxes Federal Gift Tax Exclusion (annual) –$14,000 per year per person ($28,000 H&W) Gift Tax Rates: –2013 maximum rate is 40 percent Exemption Amount (lifetime) –2013 exemption amount is $5.25 million –Indexed for inflation

The End! Questions Comments Concerns

Contact Information J C. Hobbs Oklahoma Cooperative Extension Service Oklahoma State University