Get Ready for 5 Key Money Changes in 2013

Potentially painful changes in federal tax and benefit rules are scheduled to take place at the beginning of next year. Taxpayers of all stripes stand to be affected, and the window for 2013 planning is closing fast. With Labor Day just around the corner, it’s not too early to spend some time thinking about your financial planning for next year.

Review these five sets of changes and decide how they might affect you.

The fiscal cliff. Bush-era tax cuts are set to expire at the end of this year. Most of the attention regarding these cuts has involved wealthy taxpayers, but all taxpayers would see higher taxes. At the bottom end of the brackets, the lowest rate of 10 percent would disappear altogether, and the new bottom bracket would be 15 percent. People in the 25 percent, 28 percent, and 33 percent brackets would all see their top marginal tax rates boosted by three percentage points, to 28, 31, and 36 percent. And the top tax bracket of 35 percent would be replaced by a 39.6 percent bracket.

These tax cuts are the biggest component of the “cliff,” but hardly the only one. Automatic federal spending cuts of about $100 billion a year are set to begin as well. Also, Social Security payroll taxes have been reduced for the past two years to help the economic recovery. These cuts–from 6.2 to 4.2 percent of covered wages–are also set to expire, as are extended jobless benefits.

Estate and gift taxes. Wealthy folks can pass on estates of up to $5.12 million but, of course, they have to die to “enjoy” this benefit. Less painful is the fact that this ceiling also applies to a person’s lifetime exemption from gift taxes (and this exemption excludes the $13,000 annual gift exemption allowed for individual gifts each year to as many recipients as you choose). The estate and gift exemptions are set to drop next year to $1 million, and the tax rate on transfers above the exemption ceilings would rise to 55 percent from 35 percent.

Health reform changes. A trio of significant tax changes is set to take effect next year, and thus would be reflected in tax returns due in April 2014. Individuals making more than $200,000 in wage income next year ($250,000 for couples) would see their Medicare payroll tax on amounts above these levels rise to 2.35 percent from 1.45 percent. They would also pay a 3.8 percent tax on net investment income. Lastly, taxpayers who itemize their returns would only be able to deduct unreimbursed medical expenses that exceed 10 percent of their taxable incomes, up from 7.5 percent now. This higher threshold will not apply to taxpayers age 65 and older until 2017.

Medicare enrollment. The enrollment period for 2013 Medicare coverage extends from October 15 to December 7. Health reform has triggered major changes in Medicare Advantage and prescription drug plans. Don’t assume you should keep your current plan, even if it was the best one for you this year. Look carefully at competing plans. Medicare has just revamped its website to make it more helpful and easier to use.

Social Security. The annual cost of living adjustment, or COLA, for 2013 is expected to be announced in early October. The COLA went up 3.6 percent in 2012, its first rise in three years. Low rates of general inflation in the past year suggest that next year’s COLA will not be so generous. In any event, the COLA announcement is linked with 2013 changes in Medicare premiums. Look out for these announcements and use them to plan your 2013 spending and expense budgets.