Back from the Fiscal Cliff –
After much press and news, Congress began 2013 by passing the American Relief Act of 2012. The “Act” is a significant piece of tax legislation that is their partial resolution of the “Fiscal Cliff” problem. This legislation resolves the majority of the tax issues for 2012 and beyond. The second part of the resolution, dealing with the federal deficit and government spending, has been postponed until later this quarter. We expect another round of well-publicized negotiations.
We have found that the great majority of our clients will be paying more taxes. In some cases, they will be paying substantially more taxes. We compared 3 different sample taxpayers to see how much more they can expect to pay:
Example 1 – A single taxpayer with $70,000 of wages, who doesn’t itemize their deductions, will pay about $600 more per year in federal taxes. The increase in taxes is attributable to the 2% higher payroll tax which resulted from the payroll relief holiday not being extended.
Example 2 – A married couple with $400,000 of wages, $15,000 of investment income, and $55,000 of itemized deductions, will pay about $3,600 more in federal taxes. The increase in taxes is attributable to the 3.8% tax on investment income and the 2% higher payroll tax.
Example 3 – A married couple with $900,000 of earned income, $50,000 of investment income and $180,000 of itemized deductions will pay about $15,000 more in federal taxes. The increase in taxes is attributable to the 3.8% tax on investment income, the 4.6% higher tax rate on the top tax bracket and the 2% higher payroll tax.
Some significant tax provisions that apply to most individuals and businesses are as follows:
Individual and trust income tax rates – The Act preserves the current income tax rates for individuals with less than $400,000 of taxable income and married couples with less than $450,000 of taxable income. For those with taxable income over these thresholds, the earnings over the threshold amount will be taxed at the rate of 39.6%. For trusts, the 39.6% rate applies to income in excess of $11,850.
Investment income rates – Long term capital gains tax rates have increased from 15% to 20%. Qualifying dividends are taxed at the same rate as long-term capital gains. The 20% capital gains and qualifying dividends rate applies for those individuals that are in the 39.6% income tax bracket. For others, long-term capital gains continue to be taxed at a 0% or 15% rate.
Itemized deductions and personal exemptions – The Act brought back the reduction of itemized deductions for individuals having adjusted gross income in excess of $250,000 for single filers and $300,000 for joint filers. Itemized deductions will be reduced by 3% of adjusted gross income above those limits. The maximum amount of the reduction is a loss of 80% of your itemized deductions. Personal exemptions are reduced for the same taxpayers.
Charitable giving from IRAs – For 2013, the Act permits individuals to donate their required minimum distributions, up to $100,000, to charities without having to include the distribution in income.
Payroll tax holiday – The Act did not extend the payroll tax holiday. In 2013, employees will see their payroll checks decrease by 2% of their gross wages up to $113,700 (the social security tax wage base).
Depreciation – For small businesses, tangible property purchased can be expensed under section 179 up to $500,000. The $500,000 limit is reduced dollar for dollar after more than $2 million of assets are placed into service in 2013. Newly purchased property and equipment acquired in 2013, not expensed under section 179, is eligible for 50% bonus depreciation. In addition, qualified leasehold improvements and retail and food facilities are eligible for 15-year depreciation and bonus depreciation.
Business tax credits – Various tax credits, including the research and development credit that were scheduled to expire in 2011, have been extended through 2013
Qualified small business stock – The Act extends the 100% exclusion on the gain on the sale of qualified small business stock that has been held for more than five years. This provision applies to stock acquired prior to January 1, 2014.
Gifts & Estates:
Exemption and exclusion amounts – The estate tax, gift tax and generation skipping transfer tax exemptions have been retained at $5 million. With adjustments for inflation they will be $5,250,000 for 2013. The annual gift tax exclusion, also adjusted for inflation, will be $14,000 per donee for 2013.
Gift & estate tax rates – Any gifts or estates that exceed the exemption amount will be taxed at a 40% rate on the excess.
Portability – Surviving spouses will be able to utilize any unused portion of their deceased spouse’s exemption for their own gift and estate. Portability applies to gift and estate taxes, but not to the generation skipping tax.