*(Questions also printed in the Jackson Sun)*
Q: I notice for the first time this year that my employer lists the amount of health insurance paid on my W-2. Do I get a deduction for that?
A: Employees are seeing a new code on their Forms W-2 in box 14, a Code DD. This is for the total amount of health insurance for you, whether the company or you paid for it.
This is listed there for information only, and the employer is required to list that (if they file over 250 W-2s). No deduction for you, nor is it taxable under current law. If you did pay for insurance through your employer, in most cases it was paid with pre-tax dollars and would not be eligible for any further deductions.
Q: Have the income tax rates changed for 2012 and 2013?
A: Most major tax rules are the same for 2012 as they were for 2011. It is in 2013 that rates change, especially for higher-income taxpayers.
- Medicare tax is expanded in 2013 to apply to add an additional .9% tax to earned income and a 3.8% tax on most unearned income. Most IRA and pension incomes are exempt from the new tax. This applies to taxpayers with income above $125,000 married filing separate, $200,000 single or head of household, and $250,000 married filing joint.
- The itemized deduction phase-out and personal exemption phase-out is reinstated for 2013. The thresholds range from $250,000 single to $300,000 married filing joint. This means if you make this kind of money, you will not be allowed to take all your itemized deductions or exemptions.
- Higher income taxpayers making more than $400,000 (single) or $450,000 (married filing joint) will see their highest tax bracket increase from 35% to 39.6%.
- Those that do have income in the highest tax bracket also have their capital gains taxes rates increased from 15% to 20%.
Taxpayers that are subject to any of these new higher tax rates should consider shifting income or postponing 2012 deductions. Your tax advisor can assist you in looking at the options.
Q: My paycheck got smaller in January. What happened?
A: Your net paycheck did decrease by 2%. The employee’s share of Social Security tax went back up. For the last two years the rate had been decreased; the rate has now returned to 6.2% of your pay (taxed on up to $113,700 in wages). The employer match rate continues at 6.2%.
Q: Are life insurance proceeds taxable?
A: Life insurance paid to beneficiaries after the death of the insured are not subject to income tax. As clients come in to discuss their taxes, I frequently hear the dread in their voice as they disclose that they received life insurance or other inheritance. It is good to tell a client something is not taxable.
Although not subject to income taxes, life insurance is frequently subject to Federal Estate Tax or Tennessee Inheritance Tax. This tax is normally paid by the estate, not the beneficiary. The exemption to the Federal Estate Tax has increased to $5.25 million (for 2013). However, the TN Inheritance Tax has an exemption of only $1,250,000 (for 2013) with a tax rate as high as 9.5%. Families should check the value of all assets, not just cash, as they consider their long-range planning.
Tom Carson Jones, CPA, a partner with Steele Martin Jones & Company CPAs and Business Advisors in Jackson, provided the answers to these questions. His firm specializes in small business tax, accounting, and finance issues. Jones is a member of the Tennessee Society of Certified Public Accountants and serves as a member of the TSCPA’s Tennessee Tax Liaison Committee.
The advice provided in this column is based on limited information. Most complex tax concerns require additional research and should be acted upon only after consulting with a certified public accountant (CPA), the Internal Revenue Service Code or its publications. For additional tax information or to locate a CPA in your area, visit the TSCPA web site at www.tscpa.com.