My friends at the IRS have announced…. wait a second, did I just call the IRS folk ‘my friends’? Well, yes. I don’t like taxes any more than the next guy, but I hpe that by now my readers know that it’s congress that has created our incomprehensible tax code. The IRS just enforces it. From where these guys (and gals) sit it’s “don’t shoot me, I’m just the messenger.” The IRS is actually doing a fine job, making information readily available on their web site and keeping us up to date in real time by offering different newsletters. As I was saying, they announced some numbers for 2013!
Gifting – If you are giving money to friends or family each year, the annual exclusion for gifts has risen from $13,000 to $14,000 per year. If you are a couple giving your partnered child a gift, this multiplies up to $56,000 from 2012′s $52,000. The 529 College Savings account permits gifting ahead up to 5 years worth of deposits, meaning you and your spouse can each gift $70,000 into the 529 account. This requires a Form 709 to declare your transaction, and then no gifts are permitted over the next 4 years (unless the gift exemption rises beyond $14,000.)
Kiddie Tax – This is the tax that uses the parents’ tax rate on a child’s unearned income. The reduction of this income has been raised to $1000 from $950. Simply put, your child can receive $1000 in unearned income with no tax due, and an additional $1000 taxed at their rate, most often, 10%. A topic worthy of more detailed discussion.
Retirement – The 401(k), 403(b), and 457 account deposit limit has been raised to $17,500 with the same $5,500 catch-up deposit for those 50 and older. We’ve discussed whether the 401(k) decision is the right one for most investors, and it’s safe to say, grab the match. Many employers will match the first 4-6% of your income dollar for dollar, so if you earn $60,000, a 5% contribution to your account is worth 10% on day one. $6,000 deposited pretty painlessly. The IRA limit has also been increased from $5,000 to $5,500, up to $6,500 if 50 or older. Great to take advantage of the IRA especially if the fees in your 401(k) are pretty high.
Flexible Spending Account – This is the money you can have withheld pre-tax to pay for unreimbursed medical costs, including doctor copays, prescription drugs, and a number of items your insurance doesn’t cover. In 2012, there was no limit, although employers most often limited the amount you can put aside at $5,000. In 2013, Federal regulations put the limit at $2,500.
More details and comments on these changes to follow.