2013 Tax Law Changes Finalized
Tax Law Update
While much of the fiscal policy in the US remains uncertain, it appears we have some clarity on a substantial portion of the tax code going forward in relation to individuals as well as small business owners filing at the individual rate. Here are some of the more paramount changes that have been recently resolved by the President and Congress.
Marginal Tax Rates
Marginal Tax rates for 2013 will not change for those filers who have an adjusted gross income (AGI) of $399,999 ($449,999 for joint filers). Taxpayers in excess of these thresholds will see their marginal rate increase from 35% to 39.6%. However, it should be noted that there is an additional 0.90% tax applied to income in excess of $200,000 ($250,000 for joint filers) as part of Health Care and Education Reconciliation Act, sometimes referred to as “Obamacare”. Each of these income thresholds are set to be adjusted for inflation in future years.
Payroll taxes, which are designed to fund Social Security are paid by both the employee and the employer. In 2010 there was a 2% reduction as a temporary tax holiday for the employee portion, reducing this tax to 4.2%. This increases back to the 6.2% rate for the employee portion for a 2% tax increase on the first $113,700 of income, while the employer portion remains at 6.2%. The wage base of $113,700 will be adjusted for inflation and is set to increase to $117,900 in the year 2014 and $123,000 in the year 2015.
Capital Gains Taxes
Capital gains rates will increase from 15% to 20% on long term capital gains for individuals with an AGI in excess of $400,000/$450,000 filing jointly. All other filers will continue to pay the 15% rate unless their marginal income tax rate is below 15%. The short term capital gains will continue to be taxed at the individual marginal income tax rate. However, in addition those over the threshold amount in AGI of $200,000/$250,000 for joint filers will have an additional 3.8% tax on all capital gains as a result of the Health Care and Education Reconciliation Act. The 3.8% is levied on the lesser of the income in excess of the threshold or investment income.
It is also important to note that those individuals who are subject to the parallel tax code created by the Alternative Minimum Tax (AMT) may pay a substantially higher tax rate on long term capital gains. Additionally, individuals who have an ordinary income tax rate below 15% will continue to pay ZERO on long term capital gains.
Individuals with an AGI in excess of $400,000/$450,000 who receive dividends from stocks or mutual funds that are deemed qualified (typically domestic corporations) will see an increase from 15% to 20%. Additionally, the 3.8% tax to fund the Health Care and Education Reconciliation Act will apply to qualified dividends as well for those who have an AGI above the previously stated threshold amount of $200,000/$250,000.
Also note that for those in excess of this threshold, the 3.8% tax also applies to interest earned on savings/CD’s, rental income & royalties.
The Pease Provisions
The Pease limitation which was repealed 12 years ago has been reinstated. This is effectively a limitation on itemized deductions. It is set to limit itemized deductions by 3% of the amount of which a filers AGI exceeds $250,000/$300,000 for joint filers. However, the reduction is capped so that the total reduction cannot be more than 80% of all itemized deductions.
Personal Exemption Phaseout
The threshold amount for this phaseout is $250,000/$300,000 for joint filers. Under this phaseout the total amount of exemptions that can be claimed by a taxpayer are reduced by 2% for each $1,250/$2,500 for joint filers by which their AGI exceeds the threshold.
Child Tax Credit
This credit will remain at $1000 per child.
The Federal estate tax exclusion was made permanent at $5,000,000. The exclusion for 2012 was $5,120,000. However, it was set to be reduced to $1,000,000 in 2013. The gift tax and generational skipping tax was also unified with the estate tax exclusion at $5,000,000. Additionally, the portability feature for a married couple’s estate was made permanent. However, the tax applied above the exclusion was increased from 35% to 40%.
The AMT exemption amounts are increased to $80,800 for a couple filing jointly and $51,900 for an individual filer.
Deduction for Qualfied Tuition
The above the line deduction for qualified tuition and related expenses will be extended. The maximum deduction is $4,000 for filers with an AGI that did not exceed $65,000/$130,000 for joint filers. For those filers with an AGI in excess of $65,000/$130,000 filing jointly but did not exceed $80,000/$160,000 filing jointly, the maximum deduction is $2,000.
Additionally, a taxpayer cannot claim the deduction in the same tax year in which they have claimed the Lifetime Learning Credit or the American Opportunity Tax Credit.
IRA Distributions to Charity
This provision which treats distributions of $100,000 or less per year as tax free when paid directly to a public charity will be extended for two years.
If any of this sounds confusing, don't fret...it is. Most likely by design. So be sure and consult with a qualfied tax advisor on the best course of action for you to manuever through this fiscal mine field.
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