With or without the expiration of the Bush tax cuts, there will be tax changes next year due to inflation. That’s because a modest 1.7% increase in the Consumer Price Index for All Urban Consumers during the 12 months ended August 2012––the measuring period for many inflation-indexed items—was sufficient to trigger adjustment in certain areas.
For financial advisors, that means larger gift-tax-free transfers will be possible for clients next year. The annual exclusion from gift taxes rises to $14,000 per recipient, per donor, in 2013, its first bump since 2009.
Clients will be able to make larger retirement-plan contributions next year, too. Specifically, workers may defer $500 more salary into their 401(k) or other employer plan.
Business owners who offer defined-contribution plans such as profit-sharing or money purchase plans, as well as self-employed clients with solo 401(k)s, can sock away $1,000 more for themselves on a tax-deferred basis in 2013, says consulting actuary James van Iwaarden, principal at Van Iwaarden Associates in Minneapolis. This change reflects an increase from $50,000 to $51,000 in the limit on DC plans’ total contributions (employee plus employer contributions).
These and other figures for 2013 are highlighted in the accompanying table. More information is available from the Internal Revenue Service in Revenue Procedure 2012-41.
As always, some items subject to indexing won’t change. For example, catch-up contributions to 401(k)s and IRAs for clients age 50 or older will stay put at $5,500 and $1,000, respectively.
Unannounced as of this writing were adjustments hinging on the fate of the Bush tax cuts, such as the standard deduction
for married couples. It’s currently double the amount that single taxpayers can deduct, but it was a smaller multiple before the Economic Growth and Tax Relief Reconciliation Act of 2001.
The 2001 act’s retirement-plan provisions were made permanent in 2006 by the Pension Protection Act. That means goodies like catch-up contributions and Roth 401(k)s won’t disappear on December 31, even if the rest of the 2001 act barrels over the fiscal cliff.
––Eric L. Reiner
Inflation Changes Taxes For 2013
December 2012
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