CCH recently released a fantastic Tax Briefing on the legislation passed to avoid the tax die of the Fiscal Cliff. There were some significant changes to the tax law, as well as avoidance of some terrible sunsets. I think my personal opinion of the deal would be better suited for another post. Below are some of the key highlights:
2013 Income Tax Changes via American Taxpayer Relief Act
Key Income Tax Provisions
- Taxpayers with taxable income of $399,999 ($449,999 for married taxpayers filing jointly) will not have their income tax rate changed.
- So if you were in the 10%, 15%, 25%, 28% 33% or 35% marginal tax rate nothing as changed as it relates to your income tax rate on ordinary income.
- Taxpayers with taxable income of $400,000+ ($450,000 for married taxpayers filing jointly) will be taxed at 39.6% (these taxpayers will obviously still benefit from all those lower tax brackets until they hit that 400,000th dollar).
- All brackets are going to be adjusted for inflation
- Those provisions which try to minimize the marriage penalty are extended
- Finally a permanent AMT (Alternative Minimum Tax) solution has been implemented
- Sunset of temporary Social Security Tax reduction (The 6.2% FICA taxes paid by employees to 4.2% which was initiated a couple years back)
Key Capital Gains and Dividend Tax Provisions
- Increases the long term capital gains and qualified dividend tax rates from 15% to 20% for those that exceed the $400,000/$450,000 threshold above
- Those with an income which is below the top of the 15% bracket will enjoy a 0% long term capital gain rate
- All others will have a 15% rate for both dividends and long term capital gains
Pease Limitation is Back
- This limitation has been absent for 12 years.
- It reduces most itemized deductions by 3 percent of the amount by which AGI exceeds a specified threshold, up to a maximum reduction of 80 percent of itemized deductions.
- That threshold is now $300,000 for married couples filing jointly and $250,000 for unmarried taxpayers
Personal Exemption Phaseout is Also Back
- According to CCH, “reduces most itemized deductions by 3 percent of the amount by which AGI exceeds a specified threshold, up to a maximum reduction of 80 percent of itemized deductions.”
- That threshold is $300,000 for married couples filing jointly and $250,000 for unmarried taxpayers
2013 Update to Miscellaneous Income Tax Deductions
- Child credit is set at $1,000 (it was supposed to revert to $500)
- Provides a permanent suspension of the 60 month deductibility of education loan interest
- One year extension of not including the cancellation of mortgage debt as income
- Two year extension of qualified distribution to charity of required minimum distributions
2013 Federal Estate and Gift Tax Changes
- The Federal Estate Tax exclusion amount is set at an inflation adjusted $5,000,000. The amount was set to sunset to a $1,000,000 if nothing was done
- The Federal Estate Tax rate increased from 35% to 40%
- Portability was extended
- Gift taxes were kept unified with Estate taxes so that you can gift up to $5,000,000 (inflation adjusted) before getting hit with a gift tax which is set at that same 40% rate.