On January 2, 2013, the President signed into law the American Taxpayer Relief Act of 2012. In addition, there are laws that created provisions that came into play in 2013. The major provisions are summarized below.
Gift and Estate Tax Provisions
The federal estate and gift tax exemptions were scheduled to go back down to $1 million in 2013, but ATRA set them both at $5,000,000, adjusted for inflation. Therefore, in 2013 the exemption amounts are ,250,000 per person, or ,500,000 per married couple. Also made permanent is “portability”: if one spouse dies without using the exemption (e.g., by passing everything to the surviving spouse rather than to children), the deceased spouse’s unused exemption can be transferred to the surviving spouse, who can apply it against later gift or estate taxable transfers (there is no portability of the generation skipping transfer tax exemption). The tax rate is increased from last year’s 35% to a new 40% rate.
Income Tax Provisions
Ordinary income tax rates stay the same for most people; new 39.6% rate at high incomes. The current rates remain at 10%, 15%, 25%, 28%, 33% and 35%. Starting in 2013, however, there is a new rate of 39.6% for those with income over:
- $400,000 if single
- $450,000, if married filing jointly.
Long-term capital gains and dividend rates increase to 20% at high incomes. The good news is that most dividends remain taxed at capital gains rates permanently at the 0% and 15% rates for most taxpayers. But a higher 20% capital gains and dividend rates applies to those with income over:
- $400,000, if single
- $450,000, if married filing jointly.
Alternative minimum tax patch made permanent. This helps middle income taxpayers more than high income taxpayers, but the alternative minimum tax exemption is now automatically indexed for inflation (avoiding the need for an annual Congressional “patch”).
New 3.8% Medicare surtax on net investment income. Starting in 2013, there is a 3.8% additional tax on the lesser of (i) net investment income, or (ii) the amount that the individual’s adjusted gross income exceeds:
- $200,000, if single
- $250,000, if married filing jointly.
For purposes of this tax, “investment income” includes taxable income from interest, dividends, capital gains, rents, royalties, annuities, income from business involved in trading of financial instruments or commodities, and businesses that are passive activities to the taxpayer. It includes distributions from a nonqualified annuity contract but not from a qualified plan or IRA.
Medicare Tax increase of 0.9% on employees and the self-employed at high incomes. The Medicare portion of FICA paid by employees is normally 1.45% on all wages, with no limit. The parallel version of this tax for self-employed taxpayers under SECA rules is 2.9%, again on all self-employment income, with not limit. Starting in 2013, both of these taxes increase by 0.9% for wages or self-employment income over:
- $200,000, if single
- $250,000, if married filing jointly.
Phase-out of personal exemptions and itemized deductions. For those with high incomes, increased tax rates are not the only reason they could pay more tax. Starting in 2013, personal exemptions and itemized deductions will once again be phased out. This time the phase-outs begin at adjusted gross incomes over:
- $250,000, if single
- $300,000, if married filing jointly.
As for itemized deductions, they are reduced by 3% of the amount by which the taxpayer’s AGI exceeds the above thresholds. But the reductions cannot reduce itemized deductions by more than 80%.
Charitable IRA Rollovers re-introduced. Since 2006, IRA owners over age 701/2 could make charitable donations of up to $100,000 per year directly from their IRAs without paying income tax. They correspondingly could not deduct the contribution, but this avoided the need to overcome limits on charitable deductions. The contribution also counted as an IRA required minimum distribution. The provision had expired at the end of 2011, but the new law retroactively restores it for 2012 and extends it through 2013.
