2013 CCH Whole Ball of Tax
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2013 CCH Whole Ball of Tax

Leslie Bonacum
, 847-267-7153, mediahelp@cch.com
Eric Scott , 847-267-2179, eric.scott@wolterskluwer.com
Brenda Au , 847-267-2046, brenda.au@wolterskluwer.com

Despite Higher Taxes on Investments for Some, CCH Outlines Four Tax-advantaged Opportunities to Lower Taxes Now, in Future

(RIVERWOODS, ILL., January 2013) – While some investors will be hit hard by increased taxes on investments, many taxpayers can do a lot more to take advantage of tax-favored investment opportunities, according to CCH, a Wolters Kluwer business and a leading global provider of tax, accounting and audit information, software and services (CCHGroup.com).

“There are specific areas, such as retirement, education and healthcare, where the tax code has for many years provided incentives to encourage people to save,” said CCH Senior Federal Tax Analyst Mildred Carter, JD. “Individuals who are saving for any of these in traditional savings or brokerage accounts, should take a closer look at the tax-advantaged options available to them as taxes rise.”

Increased taxes on investments for 2013 include:

  • A 3.8-percent Net Investment Income tax (NII) on interest, dividends, annuities, royalties and other types of investments for those whose modified adjusted gross income (MAGI) exceeds $200,000 for single filers and $250,000 for joint filers. (For more detail on NII, see Release 6.)
  • Long-term capital gains tax rate increase from 15 to 20 percent for individuals making at least $400,000 and $450,000 for married couples filing joint returns as a result of the American Taxpayer Relief Act of 2012 (ATRA). The maximum 15-percent Bush-era tax rate will continue to apply to all other taxpayers (in some cases, zero percent for qualified taxpayers within the 15-percent or lower income tax bracket); and
  • Qualified dividends taxed at increased 20-percent capital gains tax rate for individuals making at least $400,000 and $450,000 for married couples filing joint returns, also a result of ATRA. (Qualified dividends are those received from a domestic corporation or a qualified foreign corporation.)

Four Tax-advantaged Investment Options

For taxpayers looking to get more bang for their investment buck, several tax-advantaged options exist, which can lower current taxes owed, allow investments to grow tax-free or a combination of both.

These include:

  • Maximize 401(k) matching contributions. If your employer offers matching 401(k) contributions, contributing to the maximum matched amount is a great first tax-savings investment step.
  • “If your employer, for example, matches 3 percent of your contribution, that’s free money to you and a significant amount of tax-free savings that many people may have a hard time putting aside on their own,” said Carter.

    Roth 401(k)s also have increased in popularity. Like traditional 401(k)s, money grows tax-free. However, unlike traditional 401(k)s, individuals pay taxes on the initial contribution rather than on the gains at future distribution. Additionally, while traditional 401(k)s have required minimum distributions (RMDs) starting at age 70 ½, Roth 401(k)s do not have RMDs.

    The American Taxpayer Relief Act also offers new opportunities for taxpayers looking to convert their traditional 401(k)s to Roth accounts. Historically, rollovers from a traditional 401(k) to a designated Roth account in the same plan were subject to certain qualifying events or age restrictions. However, ATRA now lifts those restrictions, allowing participants in 401(k) plans with in-plan Roth conversion features to make transfers to a designated Roth account at any time.
    “Even with higher current taxes, contributing to Roth 401(k)s can be a good choice for some people, for example, younger individuals who anticipate the value of their accounts will appreciate considerably or those who do not believe they will need the minimum distributions in retirement,” said Carter.

    The maximum amount an employee can contribute in 2013 to a 401(k) is $17,500 ($23,000 for those age 50 and over). The same rules apply for 457 and 403(b) retirement plans.

  • Contribute to an IRA – for 2012 and 2013. Both traditional IRAs and Roth IRAs allow contributions to grow tax free. The maximum contribution to either in 2013 is $5,500 ($5,000 for 2012). A $1,000 catch-up contribution also is allowed in each year for taxpayers 50 and older.
  • Contributions to traditional IRAs are tax deductible for single taxpayers with 2013 adjusted gross income (AGI) under $59,000, phasing out at $69,000 ($58,000 phasing out completely at $68,000 for 2012); and for married couples filing jointly with AGI below $95,000, phasing out at $115,000 for 2013 (under $92,000 phasing out completely at $112,000 for 2012). Higher income individuals also can make nondeductible IRA contributions.

    As with Roth 401(k)s, contributions to Roth IRAs are not tax deductible, but there are no taxes on capital gains on distribution and no RMDs. The AGI restriction for Roth IRAs in 2013 for single filers is $112,000 phasing out at $127,000 (under $110,000 phasing out completely at $125,000 for 2012); and for married, filing jointly, $178,000 phasing out at $188,000 for 2013 (under $173,000 phasing out completely at $183,000 for 2012).

    Taxpayers have until April 15, 2013, to make an IRA contribution for 2012.

    “If you haven’t yet contributed for 2012 and don’t have the funds to contribute fully to both last year and this year, you may want to determine where your contribution will provide you with the biggest tax savings,” said Carter.

    For more detail on retirement plans, see Release 27.

  • Contribute to a 529 education savings plan. Named after Section 529 of the Internal Revenue Code which created these plans in 1996, 529 plans allow you to make after-tax contributions to pay for college costs for your child or other family members. The contributions grow tax-deferred and the funds can be withdrawn tax free if used for qualified college tuition and other expenses.
  • Nearly every state operates a plan as well as many educational institutions. In most instances, the state plan you select does not limit your choice of schools. For example, a resident in Illinois can invest in a California plan and send the student to a university in New York. The amount put into a 529 plan may be tax deductible under some state income taxes and distributions for qualified tuition and expenses are not taxed.

    Additionally, while a beneficiary has to be named in order to open a 529 plan, the beneficiary can be changed to another family member at a later date. For example, if the initially designated beneficiary earns scholarships or chooses not to go to college, a different family member can be named beneficiary.

    “Because 529 plans are funded with after-tax dollars, you don’t have immediate tax savings, but avoiding future taxes on capital gains and dividends means you’ll have saved more to cover education costs,” said Carter.

    For more detail on education tax savings, see Release 21.

  • Contribute to an HSA – for 2012 and 2013. High-deductible health plans continue to increase in popularity as people look to lower their monthly health care premiums. Taxpayers with these plans also can open Health Savings Accounts (HSA) and make pre-tax contributions and take tax-free distributions for qualified medical expenses for themselves and their families. These distributions can be made at any time, for example, they could be made to pay for qualified expenses in the near-term or saved to cover health care expenses in retirement.
  • In order to be a high-deductible health plan under IRS standards, the plan must have a minimum annual deductible for 2013 of $1,250 for individual coverage ($1,200 for 2012) or $2,500 for family coverage ($2,400 for 2012).

    For 2013, the maximum amount you can contribute to an HSA is $3,250 ($3,100 for 2012) for individuals and $6,450 ($6,250 for 2012) for families. Those who reach age 55 by the end of the tax year are eligible for a catch-up contribution of $1,000. Contributions cannot be made by someone enrolled in Medicare.

    As with IRAs, taxpayers also have until April 15, 2013, to make their 2012 HSA contributions.

About CCH, a Wolters Kluwer business

CCH, a Wolters Kluwer business (CCHGroup.com) is a leading global provider of tax, accounting and audit information, software and services. Celebrating its 100th anniversary in 2013, CCH has served tax, accounting and business professionals since 1913. Among its market-leading solutions are the ProSystem fx® Suite, CCH Integrator™, CCH® IntelliConnect®, Accounting Research Manager® and the U.S. Master Tax Guide®. CCH is based in Riverwoods, Ill. Follow us on Twitter @CCHMediaHelp. Wolters Kluwer (www.wolterskluwer.com) is a market-leading global information services company. Wolters Kluwer is headquartered in Alphen aan den Rijn, the Netherlands. Its shares are quoted on Euronext Amsterdam (WKL) and are included in the AEX and Euronext 100 indices.

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