Congress resurrected the top rate of 39.6% for taxable income
over $400,000 ($450,000 for married couples) for the 2013 tax year.
Taxpayers in this bracket will also pay a 20% rate on long-term
capital gains and dividends, instead of the 15% most taxpayers pay.
Congress also revived phaseouts of itemized deductions and personal
exemptions for taxpayers with adjusted gross income of $250,000 or
more, or $300,000 for married couples.
Separately, taxpayers who have a large amount of investment
income could owe more because of tax provisions included in the
Affordable Care Act. The ACA introduced a 3.8% surtax on unearned
income, including dividends, royalties, rents and capital gains.
This surtax affects single taxpayers with modified adjusted gross
income of $200,000 or more, or married joint filers with MAGI of
$250,000 or more. The surtax will be based on your investment
income or the amount by which your MAGI (which includes investment
income) exceeds the threshold, whichever is less.
There's not a lot you can do now to reduce these new taxes on
2013 income. However, if you're self-employed or have
self-employment income from a part-time job, consider the
tax-saving potential of a Simplified Employee Pension (SEP) IRA.
You have until April 15 (or October 15 if you file an extension) to
set up and fund a SEP for 2013, says Tim Steffen, director of
financial planning for Robert W. Baird & Co., a
wealth-management firm. Money stashed in a SEP IRA will reduce your
taxable income. For 2013, you can contribute up to 20% of your
self-employment income, up to $51,000.
If you work for an employer that doesn't offer a 401(k) or other
type of retirement plan, you have until April 15 to contribute to a
deductible IRA, which will also reduce your taxable income. For
2013, you can contribute $5,500, or $6,500 if you were 50 or older
One new tax provision could end up saving upper-middle-income
taxpayers money. Congress imposed a permanent fix for the
alternative minimum tax, a parallel tax system originally created
to prevent wealthy taxpayers from using tax breaks to avoid taxes
altogether. Because the original law was never indexed to
inflation, the AMT has gradually affected more middle-income
taxpayers. The legislation stopped that encroachment. Taxpayers who
haven't been subject to the AMT in the past are unlikely to get hit
with it now. And because the legislation also included inflation
adjustments, some taxpayers who were just over the threshold for
the AMT may no longer have to pay it.