Four Things to Know About 2013 Tax Developments

The 112th Congress rang in the New Year with marathon midnight hour holiday sessions that culminated in the American Taxpayer Relief Act of 2012 (ATRA). Effective January 1, 2013, ATRA provides for permanent extension of many of the reduced Bush-era income tax rates, but allows marginal income tax rates to increase for high-income taxpayers. ATRA establishes permanent unified gift, estate and generation-skipping transfer tax rates and exclusions/exemption of 40% and $5,000,000, indexed for inflation, with portability for the estate tax. ATRA also provides for an increase in the AMT thresholds for 2012, with inflation adjustments in subsequent years. The temporary 2% payroll tax reduction expires and the Medicare contribution taxes come into effect for 2013 as scheduled. 

Here are key planning issues to be aware of as we welcome 2013:

1. New Income Tax Environment
Permanent provisions for 2013:
  • Ordinary income tax rates 10%, 15%, 25%, 28%, 33%, 35% and 39.6% on income over $400,000 for singles and $450,000 for married filing jointly
  • Capital gain tax rates 0%, 15% and 20% on income over $400,000 for singles and $450,000 for married filing jointly, with additional special purpose rates (e.g., collectibles 28%)
  • Qualified dividends taxed at capital gain tax rates
  • Phase-out personal exemptions and up to 80% of itemized deductions for income over $250,000 for singles and $300,000 for married filing jointly
  • No current change in tax treatment of tax-exempt municipal obligations
2. Wealth Transfer Considerations
Effective in 2013:
  • Top gift, estate and generation-skipping transfer tax rates permanently increased to 40%
  • Gift, estate and generation-skipping transfer tax exclusions and exemption permanently set at $5,000,000, with portability for estate tax and inflation adjustments (for 2013, $5,250,000)
3. New Medicare Taxes
  • 0.9% additional employee hospital insurance portion of employment tax on wages of high-wage earners
  • 0.9% additional hospital insurance portion of self-employment tax on self-employment income of high-earners
  • New 3.8% Medicare contribution tax on individual net investment income to the extent modified adjusted gross income exceeds threshold amounts, and accumulated net investment income of certain trusts and estates
  • Individual modified adjusted gross income thresholds $250,000 married filing jointly, $125,000 married filing separately, $200,000 all other individuals, and highest marginal tax bracket for trusts and estates (estimated $11,950 in 2013)
  • Proposed regulations issued in November 2012 provide guidance for application of taxes until final regulations adopted
4. Looking Forward
  • High-income taxpayers affected by increases in ordinary income, qualified dividend and long-term capital gain tax rates as well as the new Medicare taxes may review and consider any appropriate revision of estimated tax payments
  • The provision for limited tax-free required minimum distributions from individual retirement plans for charitable purposes has been extended to December 31, 2013 and, for 2012, there are special qualified distribution rules available for contributions prior to February 1, 2013
  • The debt ceiling has not been increased and the scheduled sequestration has only been extended for 2 months
  • Continued legislative activity on expenditures and the budget will be ongoing in 2013

As of 01/11/2013