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Tax Laws Change for 2013

The following is a summary of the main features of the “Fiscal Cliff Act”.

Individual Income Tax Rates

The highest tax bracket for income taxes has increased to 39.6%, if the taxpayer exceeds certain thresholds:

All of the individual margin tax rates have been retained (10%, 15%, 25%, 28%, 33%, and 35%). There is now a new top rate of 39.6% which will be imposed on taxable income over $400,000 for single filers, $425,000 for joint head-of-household filers, and $450,000 for married taxpayers filing jointly ($225,000 for each married spouse filing separately).

Itemized deductions and personal exemptions are phased out. The personal exemptions and itemized deductions phase-out  has been reinstated at higher thresholds; $250,000 for single taxpayers, $275,000 for heads of household, and $300,000 for married taxpayers filing jointly.

Capital Gains and Dividends

The highest tax bracket for capital gains taxes has been increased to 20% for certain taxpayers whose income exceeds certain thresholds:

Estate and Gift Taxes

  1. The applicable exclusion amount for estate and gift tax purposes is $5,000,000 adjusted for inflation. The lifetime exemption continues to be unified with the exemption at death. Most planning techniques that our firm recommended in the past several years remain intact.
  2. The estate and gift tax exclusion amount is retained at $5,000,000 indexed for inflation ($5.12 million in 2012), but the top tax rate increases from 35% to 40% effective beginning in 2013. The estate tax “portability” election, under which, if an election is made, the surviving spouse’s exemption amount is increased by the deceased spouse's unused exemption amount, was made permanent by the act.
  3. The Generation-Skipping Transfer Tax continues to match the applicable exclusion amount and therefore, remains at $5,000,000 adjusted for inflation.
  4. The annual exclusion for gifts is now $14,000 per donee per year

New Taxes

In addition to the various provisions discussed above, some new taxes also took effect January 1, 2013 as of result of the previously enacted health care reform legislation.

  1. The employee portion of the hospital insurance tax part of FICA, has been increased by 0.9% on wages that exceed the threshold amount. The so called threshold amount is $250,000 in the case of a joint return or surviving spouse, and $200,000 in any other case.
  2. On January 1, a new tax is imposed on individuals equal to 3.8% of the lesser of the individual's net investment income for the year or the amount of the individual’s modified adjusted gross income (AGI) which exceeds the threshold amount. A married individual who files a joint return and surviving spouse, have a threshold amount of $250,000, for married taxpayers filing separately, it is $125,000; and for other individuals it is $200,000. Net investment income is defined as investment income reduced by deductions properly allocable to that income. Investment income includes income from interest, dividends, annuities, royalties, and rents, and net gain on the sale or disposition of property other than such income derived in the ordinary course of a trade or business. Income from a trade or business that is a passive activity or from a trade or business of trading financial instruments or commodities is included in the investment income.

Qualified Charitable Distributions Not Exceeding $100,000 by an Eligible Taxpayer

A planning technique involving persons over the age of 70 1/2 was reinstated until December 31, 2013. This allows for an IRA owner to direct a distribution of up to $100,000 to a qualified charitable organization without having to pay income taxes on that distribution.

The Act extends this charitable distribution provision through the end of 2013.  The qualified charitable distributions were not permitted after December 31, 2011 but, the new Act provides a one month window to allow eligible taxpayers to make a qualified charitable distribution which will be retroactively effective for tax year 2012. 

Please contact us for more information or to assist you in your planning.