|January 15, 2013|
Previously published on January 11, 2013
On January 2, 2013, President Barack Obama signed The American Taxpayer Relief Act of 2012 that retains the Bush era tax rates for most taxpayers, except for those in the highest marginal brackets, and extends many credits, deductions and exclusions. Also, in 2013, there is a 0.9% increase in the employee portion of the Medicare Tax and a new tax of 3.8% on net investment income. These tax increases were enacted in 2010 and became effective on January 1, 2013. The following is a brief summary of these provisions.
AMERICAN TAXPAYER RELIEF ACT OF 2012
- Highest marginal income tax rate is 39.6% for married couples filing jointly with taxable income in excess of $450,000 and single individuals with taxable income in excess of $400,000 (referred to as “threshold amounts”).
- Highest marginal income tax rate for individuals with taxable incomes below the threshold amounts is 35%.
- Effective January 1, 2013, the rate brackets are 10%, 15%, 25%, 28%, 33%, 35% and 39.6%
- Tax rate for capital gains and qualifying dividends increased to 20% for taxpayers in the 39.6% rate bracket and remains at 15% for all other taxpayers except those in the lower brackets.
- Personal exemptions and itemized deductions are phased out for married couples filing jointly with adjusted gross income in excess of $300,000 and single individuals with adjusted gross income in excess of $250,000.
- The AMT exemption amount is $78,500 for married couples filing jointly and $50,600 for single individuals.
- The Hope Scholarship Credit and Lifetime Learning Credit are extended for 5 years through 2017.
- Individual tax extenders through 2013 include: the exclusion from gross income of discharge of qualified principal residence indebtedness, the treatment of mortgage insurance premiums as qualified residence interest, the deduction of state and local general sales taxes in lieu of state income taxes, the above-the-line deduction for qualified tuition expenses, and tax-fee distributions from IRA accounts transferred to charities.
- The 2012 employee Social Security tax rate of 4.2% was not extended; the 2013 employee Social Security tax rate is 6.2%, and the Medicare tax remains at 1.45%
Business tax extenders though 2013 include: new market tax credit, research credit, work opportunity tax credit, the 15-year straight line cost recovery method for leasehold improvements of qualified retail improvements, the Section 179 asset expensing up to $500,000, the extension of bonus depreciation, the exclusion of 100% of the gain on small business stock, and the extension of empowerment zone tax incentive and energy tax incentives.
The $5 million estate and gift tax exemption (adjusted for inflation) was made permanent, as was the $5 million generation skipping transfer (GST) tax exemption (adjusted for inflation). In 2013, these exemption amounts increased from $5,120,000 to $5,250,000 per person.
- The top estate, gift, and GST tax rate increased from 35% to 40%
- The concept of “portability” of a deceased spouse’s unused estate tax exemption to a surviving spouse was made permanent, along with an important technical correction to the 2010 Tax Bill that introduced portability.
- Numerous important improvements to the wealth transfer tax laws that would have expired in 2013 were made permanent, including the deduction for state death taxes, certain provisions regarding the installment payment of estate taxes, and GST tax relief provisions including automatic allocation rules, late allocation relief, allocation where there is an unnatural order of death, and qualified severances.
HEALTH CARE AND EDUCATION RECONCILIATION ACT OF 2010
3.8% Tax on Net Investment Income
Effective January 1, 2013, taxpayers will pay a 3.8% tax on the lesser of (i) net investment income, or (ii) the excess of an individual’s modified adjusted income above a threshold amount. The threshold amount is $250,000 for married couples filing jointly and $200,000 for single taxpayers. Net investment income includes interest, dividends, royalties, annuities, rents, and net capital gains. Income from partnerships or other pass-through entities in which the taxpayer does not materially participate is also subject to the tax.
PATIENT PROTECTION AND AFFORDABLE CARE ACT
0.9% Additional Medicare Tax
Effective January 1, 2013, each wage earner with wages in excess of $250,000 for married couples filing jointly and $200,000 for single individuals will be required to pay an additional 0.9% of Medicare taxes. Accordingly, the employee’s portion of the Medicare tax is increased from 1.45% to 2.35%. There is no increase in the employer’s portion. Employers are required to withhold the additional amount from all wages in excess of $200,000. Any additional balance is remitted on Form 1040. This increase also applies to those who are self-employed.