Monthly Archives: January 2013

What to Expect From the New Tax Bill

On January 1, 2013, Congress finally passed a tax bill that avoided the so-called “fiscal cliff” and included significant changes to the tax laws.  Some of the key provisions are summarized here.

The change that will probably have the greatest impact on most taxpayers is the expiration of the payroll tax reduction.  Congress did not renew the 2% payroll tax holiday, so the employee portion of the Social Security tax will return to 6.2%, thus decreasing slightly most employees’ paychecks.

Also of significant impact: the Bush income tax cuts were made permanent for all but the highest-income-earners.  For this purpose, the highest-income-earners are those who have taxable income over $400,000 for singles and $450,000 for married couples.  The income tax rate for them was raised from 35% to 39.6%.  The capital gains tax rate on these highest-income-earners was also increased to 20%.

This chart, from the Kiplinger Tax Letter, summarizes the income tax rates for 2013:

Marrieds: If taxable income is The tax is
Not more than $17,850 10% of taxable income
Over $17,850 but not more than $72,500 $1,785.00 + 15% of excess over $17,850
Over $72,500 but not more than $146,400 $9,982.50 + 25% of excess over $72,500
Over $146,400 but not more than $223,050 $28,457.50 + 28% of excess over $146,400
Over $223,050 but not more than $398,350 $49,919.50 + 33% of excess over $223,050
Over $398,350 but not more than $450,000 $107,768.50 + 35% of excess over $398,350
Over $450,000 $125,846.00 + 39.6% of excess over $450,000
Singles: If taxable income is The tax is
Not more than $8,925 10% of taxable income
Over $8,925 but not more than $36,250 $892.50 + 15% of excess over $8,925
Over $36,250 but not more than $87,850 $4,991.25 + 25% of excess over $36,250
Over $87,850 but not more than $183,250 $17,891.25 + 28% of excess over $87,850
Over $183,250 but not more than $398,350 $44,603.25 + 33% of excess over $183,250
Over $398,350 but not more than $400,000 $115,586.25 + 35% of excess over $398,350
Over $400,000 $116,163.75 + 39.6% of excess over $400,000
Household heads: If taxable income is The tax is
Not more than $12,750 10% of taxable income
Over $12,750 but not more than $48,600 $1,275.00 +15% of excess over $12,750
Over $48,600 but not more than $125,450 $6,652.50 + 25% of excess over $48,600
Over $125,450 but not more than $203,150 $25,865.00 + 28% of excess over $125,450
Over $203,150 but not more than $398,350 $47,621.00 + 33% of excess over $203,150
Over $398,350 but not more than $425,000 $112,037.00 + 35% of excess over $398,350
Over $425,000 $121,364.50 + 39.6% of excess over $425,000

The standard deduction and personal exemptions were raised slightly, but these, along with itemized deductions, are being phased out for high-income-earners.  For these purposes, high-income-earners are those whose Adjusted Gross Income (AGI) is over $250,000 for singles and $300,000 for married couples.

The alternative minimum tax (AMT) exemptions were also increased and will be permanently adjusted for inflation.

The Medicare surtax for high-income-earners (total earnings of over $200,000 for singles and $250,000 for married couples), which was included in the health care reform bill, will take effect in 2013, as will the Medicare surtax on net investment income for high-income-earners (modified AGI of over $200,000 for singles and $250,000 for marred couples), both at the rate of 3.8%.

The tax rates for Social Security will also be higher, due to the expiration of the 2% tax holiday and the 0.9% increase for high-income-earners, mentioned above.  The Social Security wage base, however, was raised to $113,700, and Social Security benefits go up by 1.7%.

With regard to the federal estate and gift tax, the $5 million exemption was made permanent and was increased for inflation to $5.25 million in 2013 and will continue to be indexed for inflation.  This continues to be the unified exemption amount for the estate and gift tax, and it continues to be portable between spouses.  Portability means that a married couple has $10.5 million in exemption between the two of them with the first spouse to die passing his or her unused share to the surviving spouse.  In order to use this portability, however, the surviving spouse must file an estate tax return indicating that election.  The tax rate on estates beyond the exemption amount was increased from 35% to 40%.

The annual gift tax exclusion was also increased to $14,000 per donee.  This means that in 2013 a person may gift $14,000 per donee without being required to report it or count it towards the $5.25 million lifetime exemption amount.

If you have questions regarding the new tax laws or about how these changes will affect your estate plan, please contact us, and we will be pleased to assist you..