Early on January 1st, 2013, the Senate, by a vote of 89-8, passed H.R.8, the American Taxpayer Relief Act. The Act would prevent many of the tax hikes that were scheduled to go into effect today and retain many favorable tax breaks that were scheduled to expire, but it would also increase income taxes for some high-income individuals and slightly increase transfer tax rates. Here are some of the main outcomes of the act:
Individual tax rates: all the individual marginal tax rates are retained (10%, 15%, 25%, 28%, 33%, and 35%). A new top rate of 39.6% is imposed on taxable income over $400,000 for single filers, $425,000 for head-of-household filers and $450,000 for married taxpayers filing jointly ($225,000 for each married spouse filing separately).
Exemptions and deductions: the personal exemptions and itemized deductions phase-out is 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 and dividends: 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.
Alternative minimum tax: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.
Education: the American opportunity tax credit for qualified tuition and other expenses of higher education was extended through 2018.
Other credits and items that were extended for the same five-year period include enhanced provisions of the child tax credit under and the earned income tax credit under.
Other provisions: act also extended through 2013 a number of temporary individual tax provisions:
- Deduction for certain expenses of elementary and secondary school teachers;
- Exclusion from gross income of discharge of qualified principal residence indebtedness;
- Mortgage insurance premiums treated as qualified residence interest;
- Deduction of state and local general sales taxes.
The increased expensing amounts under Sec. 179 are extended through 2013.
The availability of an additional 50% first-year bonus depreciation extended for one year by the act.
Energy tax extenders through 2013
- Credit for energy-efficient existing homes;
- Credit for alternative fuel vehicle refueling property;
- Credit for energy-efficient new homes;
- Credit for energy-efficient appliances.
Additional hospital insurance tax on high-income taxpayers: The employee portion of the hospital insurance tax part of FICA, normally 1.45% of covered wages, is increased by 0.9% on 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.
For self-employed taxpayers, the same additional hospital insurance tax applies to the hospital insurance portion of SECA tax on self-employment income in excess of the threshold amount.
Medicare tax on investment income: Starting Jan. 1, Sec. 1411 imposes a 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.
Investment income includes income from interest, dividends, annuities, royalties, and rents, and net gain from disposition of property, other than such income derived in the ordinary course of a trade or business. However, income from a trade or business that is a passive activity and from a trade or business of trading in financial instruments or commodities is included in investment income.
Medical care itemized deduction threshold: 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.
Health flexible spending arrangement: Effective for cafeteria plan years beginning after Dec. 31, 2012, the maximum amount of salary reduction contributions that an employee may elect to have made to a flexible spending arrangement for any plan year is $2,500.
Please contact us if you have any questions regarding how the American Taxpayer Relief Act will affect your individual tax position.
Gabrielle M Luoma CPA PLLC