For nonqualified deferred compensation, the subject of our
sister website myNQDC.com, the American Taxpayer Relief Act has some impacts.
In general, these make it more appealing than ever to defer income into the
future through nonqualified plans. The following potential tax increases apply
to nonqualified deferred compensation with effect from January 1, 2013.
The top federal
withholding rate on supplemental income rose to 39.6%. The withholding rates on
supplemental income apply to current and former employees at the distribution
of deferred compensation. The higher of two flat federal rates for withholding
from supplemental income changed under the new tax law, as the rates are tied
to income tax brackets. For aggregate supplemental wage payments totaling up to
$1 million during the year, the rate is unchanged at 25% (the rate of the third
income tax bracket). For aggregate supplemental wage payments that exceed the
level of $1 million in a calendar year, the rate is now 39.6% (the new rate of
the highest income tax bracket).
The Social
Security rate returned to 6.2%. At the time of your compensation deferral or
the vesting of a company match or contribution, you pay Social Security tax. In
2013, the Social Security tax rate returned to 6.2% from the reduced rate of
4.2% that applied in 2011 and 2012, as the new tax law did not extend the
reduction in payroll tax. Social Security tax applies up to a certain amount of
yearly income ($113,700 in 2013) and not to yearly income above that threshold.
At deferral or vesting, you also pay Medicare
tax. Separately from the American Taxpayer Relief Act, in 2012 the Affordable
Care Act increased the Medicare tax rate on compensation income for high-income
taxpayers from 1.45% to 2.35%. In addition, a new 3.8% Medicare surtax now
applies to investment income, such as capital gains from stock sales, though it
is unlikely that this 3.8% surtax will apply to distributions from nonqualified
plans. Both of these tax changes became effective on January 1, 2013.
Advantages Of Nonqualified Plans
Generally, the rise in tax rates increases the
attractiveness of deferring income into the future through nonqualified plans.
Deferrals can keep
your yearly taxable income below the thresholds for the new top tax rates on
ordinary income (39.6%) and capital gains and dividends (20%). These top rates
are triggered for single filers with yearly taxable income of more than
$400,000 and for married joint filers with yearly taxable income of more than
$450,000.
Deferrals can also
lower your modified adjusted gross income (MAGI) below the thresholds for the
increases in Medicare tax detailed above. These new Medicare tax provisions
apply to single filers with yearly MAGI of more than $200,000 and to married
joint filers with yearly MAGI of more than $250,000.
Deferrals can help
to keep your adjusted gross income (AGI) below the threshold for phaseouts on
personal exemptions and itemized deductions, which under the new law have
returned for single filers with AGI of $250,000 and married joint filers with
AGI of $300,000.
Each person's situation is different, however, and you
should make projections involving various factors:
your calculation
of current and future tax rates for both ordinary income and capital gains
the investment
return on the compensation you defer
the growth of
alternative investment(s) for the after-tax amount of the compensation without
deferral
Get free tax
services 2013 and file taxes
2013
No comments:
Post a Comment