As many of you know, Congress finally passed a bill to preserve most of the Bush-era tax cuts. It also extended many other lapsed tax provisions. What does all this mean?
If Congress did not act, individual tax rates were set to rise on everyone! The American Taxpayer Relief Act allowed the tax brackets to remain the same for individuals. A new top rate bracket was added which will be 39.6% for single filers earning over $400,000, head-of-household filers earning over $425,000, and married taxpayers filing jointly earning over $450,000.
The personal exemption and itemized deductions phaseout was reinstated at a higher threshold of $250,000 for single taxpayers, $275,000 for heads of household, and $300,000 for married taxpayers filing jointly.
Capital gains rates and dividends were set to go up as well. A 20% rate applies to capital gains and dividends for individuals above the top income tax bracket threshold; the 15% rate is retained for taxpayers in the middle brackets. The zero rate is retained for taxpayers in the 10% and 15% brackets.
The exemption amount for the AMT on individuals is permanently indexed for inflation. For 2012, the exemption amounts are $78,750 for married taxpayers filing jointly and $50,600 for single filers. Relief from AMT for nonrefundable credits is retained.
The Estate and gift tax rate was set to plunge from an exemption of $5.12 million in 2012, to only $1 million in 2013. The tax rate was also set to jump from a top rate of 35% to a top rate of 55%. The estate and gift tax exclusion amount is retained at $5 million indexed for inflation, but the top tax rate increases from 35% to 40% effective Jan. 1, 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.
There were also various temporary tax provisions were made permanent, which include the marriage penalty relief, child and dependent care credit rules, and much more. The American opportunity tax credit for qualified tuition and other expenses of higher education was extended through 2018.
The act also extended through 2013 a number of temporary individual tax provisions. The exclusion from gross income of discharge of qualified principal residence indebtedness was extended through 2013. This was a big question in Las Vegas because many people are short selling their homes.
There were also some new taxes that took effect on January 1. The employee portion of the hospital insurance tax part of FICA, which is normally 1.45%, increased to 2.35% wages that exceed a threshold amount. The additional tax is imposed on the combined wages of both the taxpayer and the taxpayer’s spouse, in the case of a joint return. The threshold amount is $250,000 in the case of a joint return or surviving spouse, $125,000 in the case of a married individual filing a separate return, and $200,000 in any other case.
A new tax on individuals equal to 3.8% of the lesser of the individual’s net investment income for the year or the amount the individual’s modified adjusted gross income (AGI) exceeds a threshold amount. For estates and trusts, the tax equals 3.8% of the lesser of undistributed net investment income or AGI over the dollar amount at which the highest trust and estate tax bracket begins.
For married individuals filing a joint return and surviving spouses, the threshold amount is $250,000; for married taxpayers filing separately, it is $125,000; and for other individuals it is $200,000.
The threshold for the itemized deduction for unreimbursed medical expenses has increased from 7.5% of AGI to 10% of AGI for regular income tax purposes. This is effective for all individuals, except, in the years 2013–2016, if either the taxpayer or the taxpayer’s spouse has turned 65 before the end of the tax year, the increased threshold does not apply and the threshold remains at 7.5% of AGI.
For more information about the tax changes and how they will impact your financial situation, please feel free to contact me at 702) 675-3524 or e-mail Info@MichaelJohnsonCPA.com
This is a summary of the changes for individuals. To read the full article, please go to http://www.journalofaccountancy.com/News/20137097.htm
