The changes for tax year 2013 are already in place, but many individuals are still struggling to figure out what the new laws and regulations mean for their investments, estate plans, and businesses, says Steve Foster, a vice president and client adviser at FirstMerit. “With the 2012 tax season behind us, we’re spending a lot of time helping clients understand the significant changes that are taking place for 2013, how they may be affected, and the planning opportunities available to them,” he says.
Will anything change for taxpayers in 2013?
The American Taxpayer Relief Act of 2013, signed into law on Jan. 2, averted the tax increases that would have resulted from the expiration of 2001 tax laws known as EGTRAA, or the Bush-era tax cuts. However, there are changes that will affect all wage earners, while others will impact only those taxpayers in the highest bracket. There are also a number of tax deductions, credits, incentives and tax treatments that were extended and will be a benefit to business owners.
What is the change that will affect all wage earners?
The act did not include an extension of the Social Security payroll tax reduction that began in 2011. As a result, the tax rate for the wage earner reverted from 4.2 percent to 6.2 percent, so in 2013, taxpayers are taking home 2 percent less than they did in the previous two years.
What are some of the other significant provisions of the act?
While the income tax brackets enacted in 2001 — ranging from 10 to 35 percent — are now permanent, a new 39.6 percent income tax bracket has been added for high-income earners. In addition, those in that higher tax bracket — singles with taxable income over $400,000 and joint filers with taxable income in excess of $450,000 — will now have capital gains and qualified dividends taxed at 20 percent, compared to 15 percent previously. Other changes include reinstated phase-outs of personal exemptions, new limits on itemized deductions and increased adjusted gross income limitations for deducting medical expenses. In summary, it will primarily be the higher income earners who will feel the pain of both higher tax rates and reduced tax deductions.
What provisions could positively affect taxpayers?
In addition to maintaining existing income tax rates for the majority of taxpayers, numerous credits and exemptions were also extended or made permanent, including the alternative minimum tax exemption amount, which has been permanently patched and will be indexed for inflation. Additionally, the child tax credit was also made permanent, as well as a number of tax incentives pertaining to higher education.
In addition, the estate tax exemption remains at $5 million per person and $10 million per married couple and will be indexed for inflation. The exemption amount also remains portable to spouses, who previously had to use it or lose it. The downside is that the top estate and gift tax rate will increase from 35 to 40 percent. Lastly, the act extended the provision allowing tax-free distributions from individual retirement accounts directly to public charities through 2013.
How does the act affect business owners?
The act extended a number of tax deductions for businesses that were set to expire, including the enhanced code Section 179 business expensing and 50 percent bonus depreciation on qualified property. Both provisions allow businesses to take larger deductions now rather than waiting until future years.
Are there any other tax changes in 2013 that are not part of the act?
Yes. In 2013 taxpayers may now be subject to an additional income and capital gains tax under the Patient Protection and Affordable Care Act (PPACA) — a.k.a. Obamacare. Under PPACA, there is an additional 3.8 percent surtax on capital gains, dividends and other investment income for certain taxpayers — singles with more than $200,000 in modified adjusted gross income and joint filers with more than $250,000 — which also includes trusts and estates. Therefore, the effective top rate on capital gains and dividends is now 23.8 percent.
For more information, contact Steve Foster at steve.foster@?rstmerit.com. FirstMerit does not offer tax advice. Please consult your tax professional.