Planning for Changes
As of November 30, 2012, there was no significant progress in fiscal negotiations. Moving into 2013 a number of tax law changes will automatically occur due primarily to the expiration of the Bush-era tax cuts. Certain changes fixed by “Obamacare” legislation are unlikely to be repealed anytime soon. The following should provide you with perspective on some of the changes set to take place if there are no modifications by Congress and the Administration. Some changes have already occurred effective for 2012. If you have questions on these or other provisions that may impact your tax situation for 2012 or 2013, please contact your HLB Gross Collins, P.C. representative.
There will be an additional Medicare tax of 0.9% on wages and self-employment income above a threshold amount or $900 per hundred thousand dollars of income above the threshold. Click here to read more on this topic.
There will be an additional Medicare tax of 3.8% on net investment income above a threshold amount or $3,800 per hundred thousand. This additional medicare tax also applies to estates and trusts above a much lower threshold amount. Click here to read more on this topic.
The top marginal tax rate on ordinary income is scheduled to go from 35% back to 39.6%, an increase of 4.6 percentage points. This is the equivalent of $4,600 per hundred thousand.
The tax rates below the top marginal rate are all scheduled to increase. For 2013, the top marginal rate on ordinary income for taxpayers who are single or married filing jointly should begin at a level of $398,350 of taxable income. For a taxpayer whose taxable income is at or exceeds $398,350, the increase in the tax rates below the top marginal rate will result in an additional tax of approximately $12,221 for married filing jointly and approximately $11,310 for single taxpayers.
Dividend income classified as qualified dividends (generally qualifying stock held more than 60 days in the 121-day period beginning 60 days before the ex-dividend date) will be taxed as ordinary income rather than at a maximum tax rate of 15%. If an individual is subject to a 39.6% marginal tax rate, that would represent an increase of 24.6 percentage points from the 15% rate, or $24,600 per hundred thousand dollars of dividend income. This increased rate results in the tax on dividend income more than tripling, and that is before the imposition of the 3.8% additional Medicare tax discussed above.
There are several different tax rates for different types of long term capital gains. Collectibles are taxed at 28%; unrecaptured section 1250 gain (related to depreciation on real estate) is taxed at 25%. Most “other capital gain” is taxed at a maximum rate of 15% if held long term (more than one year). This top rate is schedule to return to 20% for 2013, representing a 5 percentage point increase or $5,000 per hundred thousand dollars of long term capital gains. Qualifying 5 year property may be eligible for an 18% long term capital gain tax rate.
The phase-out of itemized deductions for higher income taxpayers returns in 2013. Affected itemized deductions (excludes medical expenses, investment interest expense, casualty/theft losses, allowed gambling losses) will be reduced by the lesser of three percent of adjusted gross income over a threshold amount or 80 percent of otherwise allowable itemized deductions. The 2013 threshold amount is projected to be $178,510 for taxpayers other than married filing separately. Basically you are losing $3,000 of itemized deductions per hundred thousand dollars of income over the threshold. This loss of itemized deductions will not only impact the federal return but likely also the state return (if adopted by that state). For example, a Georgia resident in a 39.6% federal marginal tax rate and a Georgia tax rate of 6% has a combined tax rate of 45.6%. A loss of $3,000 in itemized deductions will result in an additional $1,368 in federal and state taxes. Or another way of looking at this is $1,368 of additional taxes for every hundred thousand dollars of adjusted gross income above the threshold.
There has been discussion of limiting deductions rather than increasing tax rates. If the top marginal federal rate of 35% remains in effect along with a 6% Georgia rate for a marginal rate of 41%, Georgia taxpayers would see an increase in taxes of $4,100 per $10,000 of itemized deductions in excess of the ceiling.
In 2013, itemized medical expenses will be deductible for regular tax purposes to the extent they exceed 10% of a taxpayer’s adjusted gross income, up from 7.5% in 2012. For individuals 65 or older the 7.5% floor will remain in place.
Personal exemptions are projected to be $3,900 for 2013 and will be subject to phase-out in 2013 starting at adjusted gross income of $261,650 with complete phase-out at $384,150 for married filing jointly and $174,450 with complete phase-out at $296,950 for single. For a taxpayer in a 39.6% tax rate, this would result in an additional $1,544 in taxes per lost personal exemption.
The 2012 payroll tax holiday is scheduled to expire after December 31, 2012, raising the employee share of the social security tax from 4.2% to 6.2%. The maximum social security earnings level for 2013 is $113,700. The increase of 2% will result in $2,274 of additional taxes for taxpayers at or above the earnings limit.
Discharge of indebtedness on principal residence of up to $2 million ($1 million if married filing separately) may be excluded from gross income of individuals. This provision expires at the end of 2012.
The child tax credit of $1,000 per eligible child for 2012 declines to $500 per eligible child for 2013. Certain restrictions may further reduce the benefit.
The Section 179 election to expense up to $139,000 of qualifying depreciable property for 2012 declines to $25,000 for 2013.
The ability to take bonus depreciation of 50% on qualifying depreciable property expires at the end of 2012 except for certain longer-production period property acquired before 2013 and placed in service before 2014.
The alternative minimum tax patch actually expired at the end of 2011. The patch provides for an increase in a taxpayer’s “exemption amount” used in computing alternative minimum tax. If no patch is passed, the AMT exemption amounts are scheduled to be $33,750 for individuals and $45,000 for married filing joint for 2012. If the patch is passed the exemption amounts would increase to $50,600 for individuals and $78,750 for married filing jointly. In computing AMT, taxpayers typically make adjustments for certain items used in computing regular income taxable income. Then after the available exemption, a tax is computed at a flat 26% or flat 28% rate depending on the level of income. The taxpayer owes taxes at the higher of the regular tax or alternative minimum tax. The exemption itself is subject to a phase-out depending on the level of income.
Deductions for state and local sales tax (as an alternative to deducting state and local income tax) expired at the end of 2011.
The credit for increasing research activities expired at the end of 2011.
Gift and Estates
- The gift tax annual exclusion increases from $13,000 in 2012 to $14,000 in 2013 per donee. This is actually an inflation adjustment.
- The lifetime gift and estate tax exemption amount of $5,120,000 for 2012 falls back to $1,000,000 effective for 2013.
- The generation-skipping transfer tax exemption amount of $5,120,000 for 2012 falls back to $1 million adjusted for inflation for 2013 (estimated to be approximately $1,340,000.).
- The maximum tax rate on transfers above the exemption increases from 35% for 2012 to 55% in 2013.