Important legal information about the email you will be sending. By using this service, you agree to input your real email address and only send it to people you know. It is a violation of law in some jurisdictions to falsely identify yourself in an email. All information you provide will be used by Fidelity solely for the purpose of sending the email on your behalf. The subject line of the email you send will be "Fidelity.com: "
Time marches on, and you'll soon be receiving your 2013 W-2 and 1099s. So it's not too soon to start thinking about putting together your Form 1040 for last year. As you do, please take note of the following key federal income tax changes that took effect in 2013.
For most individuals, the 2013 federal income tax rates are the same as for 2012: 10%, 15%, 25%, 28%, 33%, and 35%. However, the American Taxpayer Relief Act (ATRA) increased the maximum rate for 2013 to 39.6%. That rate only affects singles with taxable income above $400,000, married joint-filing couples with income above $450,000, and heads of households with income above $425,000.
For most individuals, the 2013 federal income tax rates on long-term capital gains and dividends are also the same as for 2012: either 0% or 15%. However, the ATRA raised the maximum rate for 2013 to 20% for singles with taxable income above $400,000, married joint-filing couples with income above $450,000, and heads of households with income above $425,000. Folks with 2013 taxable income below these levels will pay a 15% federal rate on long-term gains and dividends or 0% for gains and dividends that would otherwise fall within the 10% or 15% brackets.
Starting in 2013, all or part of your net investment income, including long-term capital gains and dividends, can potentially get socked with an additional 3.8% "Medicare contribution tax." As a result, the maximum federal rate on long-term gains for 2013 is actually be 23.8% (versus the 15% maximum rate that applied on your 2012 return). The new 3.8% Medicare tax only applies if your adjusted gross income (AGI) exceeds: (1) $200,000 if you're unmarried, (2) $250,000 if you're a married joint-filer, or (3) $125,000 if you use married filing separate status.
Specifically, the 3.8% Medicare tax hits the lesser of your net investment income or the amount of AGI in excess of the applicable threshold. Net investment income includes interest, dividends, royalties, annuities, rents, income from passive business activities, gains from assets held for investment like stocks and bonds, the taxable portion of personal residence gains, and income and income and gains from the business of trading in financial instruments or commodities. (Income and gains from assets held for business purposes are not subject to the 3.8% tax.)
For example, a married joint-filing couple with 2013 AGI of $295,000 and $60,000 of net investment income would owe the 3.8% tax on $45,000 (the amount of AGI over the $250,000 threshold for joint-filers). If the same couple had AGI of $350,000, they would owe the 3.8% tax on $60,000 (the entire amount of their net investment income). To figure out if you owe the new 3.8% Medicare surtax, fill out IRS Form 8960 (Net Investment Income Tax).
Before 2013, the Medicare tax on salary and/or self-employment (SE) income was a flat 2.9%. If you're an employee, 1.45% was withheld from your paychecks, and the other 1.45% was paid directly by your employer. If you're self-employed, you paid the whole 2.9% yourself.
Starting in 2013, an extra 0.9% Medicare tax is charged on: (1) salary and/or SE income above $200,000 for an unmarried individual, (2) combined salary and/or SE income above $250,000 for a married joint-filing couple, and (3) salary and/or SE income above $125,000 for those who use married filing separate status. For self-employed individuals, the additional 0.9% Medicare tax hit comes in the form of a higher SE bill.
To discover whether you owe the new 0.9% Medicare surtax, fill out IRS Form 8959 (Additional Medicare Tax).
The last time we saw a phase-out rule for personal and dependent exemption deductions was back in 2009. Sadly, the phase-out deal is back for 2013 and beyond. As a result, your 2013 personal and dependent exemption write-offs might be reduced or even completely eliminated. Phase-out starts at the following adjusted gross income (AGI) thresholds: $250,000 for singles, $300,000 for married joint-filing couples, $275,000 for heads of households, and $150,000 for married individuals who file separate returns.
The last time we saw a phase-out rule for itemized deductions was also back in 2009. Unfortunately, this phase-out provision has also been resurrected for 2013 and beyond. As a result, you can potentially lose up to 80% of your 2013 write-offs for home mortgage interest, state and local income and property taxes, charitable contributions, and miscellaneous itemized deduction items (such as investment expenses and fees for tax advice and preparation). Phase-out starts as the following AGI thresholds: $250,000 for singles, $300,000 for married joint-filing couples, $275,000 for heads of households, and $150,000 for married individuals who file separate returns. More specifically, the total amount of your affected itemized deductions is reduced by 3% of the amount by which your AGI exceeds the threshold. However, the reduction cannot exceed 80% of the total affected deductions that you started off with.
Before 2013, you could claim an itemized deduction for medical expenses paid for you, your spouse, and your dependents, to the extent the expenses exceeded 7.5% of AGI. Starting in 2013, the hurdle is raised to 10% of AGI for most folks. However, if either you or your spouse were age 65 or older as of 12/31/13, the new 10%-of-AGI threshold will not affect you until 2017.
Thanks to the well-publicized 2013 Supreme Court decision, same-sex marriages that are recognized under state or foreign laws must now be recognized for federal tax purposes. So folks who were married under such laws as of the end of 2013 must use either married joint-filer status or married filing separate status for their 2013 federal income tax returns. In most cases, filing jointly will be the tax-smart choice. In any case, members of legally married same-sex couples cannot file their federal returns as unmarried individuals for 2013 and beyond.
Note that members of same-sex couples who have entered into civil unions or domestic partnerships are still treated as unmarried individuals for federal tax purposes.
Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.