Tax Law Alert: Important 2013 Tax Changes
January 4, 2013
As a result of the enactment of the American Taxpayer Relief Act of 2012 (the “Relief Act”) and the Patient Protection and Affordable Care Act (the “Health Care Act”), there are a number of tax changes that became effective January 1, 2013. This Tax Law Alert provides a brief summary of the major tax related provisions under the Relief Act and the Health Care Act.
The Relief Act
On New Year’s Day, Congress passed the Relief Act to prevent most of the tax increases that were scheduled to take effect on January 1, 2013 as part of the so-called “fiscal cliff.” The following summarizes the provisions of the Relief Act relating to the Estate and Gift Tax and the Income Tax.
1. Estate and Gift Tax Provisions
- The maximum estate tax rate for decedents dying after December 31, 2012 increases from 35% to 40%.
- The estate and gift tax exemption amount remains at $5,000,000 indexed for inflation ($5,120,000 for 2012).
- Portability, which allows the executor of a deceased spouse’s estate to transfer any unused exemption to the surviving spouse, is now permanent.
- The estate and gift tax exemption amount continues to be unified, such that the gift tax exemption will also be $5,000,000 (indexed for inflation).
2. Income Tax Provisions
- A new tax bracket of 39.6% has been created for taxable income over $400,000 for individuals, $425,000 for heads of households and $450,000 for married couples filing jointly. The tax rate for capital gains and dividends increases to 20% for these same taxpayers.
- The phase-out of the personal exemption has been reinstituted for individuals earning over $250,000, heads of households earning over $275,000 and married couples filing jointly earning over $300,000. The amount of exemptions that may be claimed on a return is reduced by 2% for each $2,500, or portion thereof, by which the taxpayer’s adjusted gross income exceeds the applicable threshold level.
- The limitation on itemized deductions has been reinstituted for individuals earning over $250,000, heads of households earning over $275,000 and married couples filing jointly earning over $300,000 (these amounts are indexed for inflation beginning in 2014). The amount of otherwise allowable deductions is reduced by 3% of the amount by which adjusted gross income exceeds the applicable threshold, but in no event is the reduction greater than 80% of itemized deductions.
- For 2012, the Alternative Minimum Tax (AMT) exemptions were set at $50,600 for individuals and $78,750 for married couples filing jointly. In addition, the AMT exemptions are now indexed for inflation in future years, thus avoiding the need for Congress to pass an AMT “patch” every year.
The Health Care Act
The Health Care Act, enacted in early 2012, contains two important tax revenue raising provisions.
1. Income Tax Provisions
- A new 3.8% tax is imposed upon net investment income, which includes capital gains, interest, dividends, annuities, royalties and rents which are not derived in the ordinary course of trade or business, excluding active S corporation or partnership income. The new tax applies only if a taxpayer’s adjusted gross income exceeds the applicable “high earner” threshold of $200,000 for an unmarried individual and $250,000 for a married couple filing jointly. The increased rate applies only to the lesser of net investment income or the amount of adjusted gross income exceeding the applicable threshold..
2. Payroll Tax Provisions
- The Medicare tax rate on wages and self-employment income is increased by .9% for individuals earning over $200,000 and married couples filing jointly earning over $250,000. This tax increase applies to any wages and self-employment income over the applicable threshold.
Neither the Relief Act nor the Health Care Act extended the Social Security payroll tax holiday, which has been in effect for the past two years. Therefore, the Social Security payroll tax increases to its previous level of 6.2% (up from 4.2%) effective on January 1 and will apply to all income levels.
A more detailed analysis of the Relief Act will be forthcoming. If you have questions, please contact any member of Wolff & Samson’s Tax, Trusts and Estates Group listed below.
Tax, Trusts and Estates Group at Wolff & Samson PC:
Sean M. Aylward
Member of the Firm
Phone (973) 530-2105
Farah N. Ansari
Phone (973) 530-2044
Phone (973) 530-2046