This legislation was signed into law on January 2, 2013. There are 157 pages to this law – great reading for insomniacs!
We have tried to highlight the provisions which will have the most impact on the majority of taxpayers.
- Marginal income and capital gains tax rates would increase relative to their 2012 levels for those with annual income over $400,000 for individuals and $450,000 for couples, but the rates below these levels would remain at their 2012 levels. The income rate would increase from 35% to 39.6%, and capital gains rate would increase from 15% to 20%.
- A phase-out of tax deductions and credits for incomes over $250,000 for individuals and $300,000 for couples would be reinstated. Limits on deductions had existed before the Bush tax cuts, and had disappeared in 2010.
Yes, the “marriage penalty” is back greater than ever!
- Changes would be made to the alternative minimum tax to permanently index it to inflation and thus avoid the annual “patch” that was required to prevent it from impacting middle-class families.
- The two year old cut of 2% of social security taxes expired. This rate will revert back to 6.2% from the 4.2% in 2011 and 2012. So, individuals making $100,000 per year will be effected by $2,000.
- The federal income tax rate on long-term capital gains has been increased from 15% to 20% for individuals with incomes of $400,000 or more ($450,000 for married couples filing jointly) beginning in 2013.
- Qualified Dividends, that is, dividends paid by U. S. and certain non-U.S. corporations to non-corporate taxpayers, are impacted by the Act, but not as significantly as had been expected. The Act does not repeal the provisions addressing qualified dividend income (“QDI”). Accordingly, QDI will remain taxable at the rates applicable to long-term capital gains, and thus at the 20% rate applicable to taxpayers with income of at least $400,000 ($450,000 for married couples).
- Taxpayers who live in states without income taxes have been permitted to deduct sales taxes instead. (In fact, all taxpayers may elect to deduct either sales or income taxes.) The ability to deduct sales and use taxes was set to expire in 2011. The Act extends the election to deduct sales and use taxes through 2013.
- The Act extends, until December 31, 2013, the ability of individuals who have attained age 70 1/2 to transfer up to $100,000 per year directly from an IRA to certain public charities without including the amount transferred in their gross income. The Act also permits IRA distributions in January of 2013 to be treated as having been made in 2012 for these purposes and permits taxpayers who received distributions in December of 2012 to treat the portion of that distribution that is transferred in cash to a public charity before February 1, 2013 as if it had been transferred directly from the IRA to the charity for these purposes.
- Several other tax incentives aimed at individuals at different levels of income were extended only by one year. As a result, the following individual tax incentives were extended by one year:
- Above-the line deduction of up to $250 for teacher classroom expenses.
- Discharge of indebtedness on principal residence excluded from gross income of individuals.
- Parity for exclusion for employer-provided mass transit and parking benefits.
- Premiums for mortgage insurance deductible as interest that is qualified residence interest.
- Contributions of capital gain real property made for qualified conservation purposes.
The ACT extended the following 2009 Obama Tax Cuts to December 31, 2017:
- The American Opportunity Tax Credit.
- The reduction in the earnings threshold for the refundable portion of the Child Tax Credit to $3,000.
- The Earned Income Tax Credit (“EITC”) for larger families.
- EIC modification and simplification – increase in joint returns, beginning and ending income level for phase-out by $5,000 indexed after 2008.
A few of the 26 Business Tax Extenders:
- Increase in Section 179 depreciation – $500,000
- Extension of 50% bonus depreciation
- Employer wage credit for activated military reservists
- Work Opportunity tax credit
We look forward to helping our clients navigate through these changes in 2013!
