Fiscal Cliff Tax Provisions 2013

Five Things Fairport Clients Should Know About the Fiscal Cliff Deal

On January 2, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012 (“ATRA”). Some of the key individual provisions of the legislation are as follows:

(1) Individual Tax Rates

All 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 and $450,000 for married taxpayers filing jointly.

(2) Phase-out of Itemized Deductions and Personal Exemptions

The itemized deductions and personal exemptions phase-out is reinstated. The phase-out for itemized deductions (also known as the Pease limitation) reduces total itemized deductions by 3% of adjusted gross income over a threshold of $250,000 for single taxpayers and $300,000 for married taxpayers filing jointly, with the reduction not to exceed 80% of otherwise allowable deductions.

The personal exemptions phase-out reduces personal exemptions by 2% for each $2,500 over the same income thresholds as the Pease limitation.

(3) Capital Gains and Dividends

A new 20% tax 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 0% rate is retained for taxpayers in the 10% and 15% brackets.

(4) Alternative Minimum Tax (AMT)

The exemption amount for AMT on individuals is now permanently indexed for inflation. For 2013, the exemption amounts are $80,750 for married taxpayers filing jointly and $51,900 for single filers, up from 2012 by $2,050 and $1,300 respectively. Relief from AMT for nonrefundable credits is also retained and made permanent.

(5) Estate and Gift Tax

The estate, gift and generation skipping transfer tax exclusion amount is retained at $5 million and indexed for inflation ($5,250,000 in 2013), but the top tax rate increases from 35% to 40% effective January 1, 2013. The estate tax “portability” election, under which, if an election is made, the surviving spouse’s exemption amount is increased by the deceased spouse’s unused exemption amount was made permanent.

Individual Provisions Expired in 2011 that are Extended Through 2013

  • 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
  • Special rule for contributions of capital gain real property made for conservation purposes
  • Above-the-line deduction up to $4,000 for qualified tuition and related expenses
  • Tax-free distributions up to $100,000 from individual retirement plans of individuals over age 70 ½ for qualified charitable purposes

New Provisions Effective for the 2013 Tax Year

  • Lawmakers did not renew the 2% cut in the employees’ share of the Social Security tax that had been in place the past two years. As a result, employees will see smaller paychecks as the 4.2% rate returns to 6.2%.
  • As part of the Affordable Care Act of 2010 and effective for 2013, a 0.9% Medicare “earned” income surtax applies to wages and self-employment income over $200,000 for single filers and $250,000 for married taxpayers filing.
  • A 3.8% Medicare “unearned” income surtax applies to net investment income over $200,000 for single filers and $250,000 for married taxpayers filing. Investment income includes interest, dividends, capital gains, annuities, royalties and passive rental income. Tax free interest and distributions from retirement plans are exempt.