The purpose of this alert is to highlight some of the significant provisions in the American Taxpayer Relief Act of 2012 (“ATRA”) that will affect many individuals and business owners in 2013 and beyond. It is important to recognize this is a partial listing and many of the provisions are still subject to interpretation. If you have any questions regarding the information contained in this alert, or if you have questions regarding how ATRA will specifically affect you or your business, please do not hesitate to contact us at email@example.com.
Individual Income Tax
- The federal income tax rate will increase to 39.6% from 35% for individuals with taxable income exceeding $400,000 and married taxpayers filing jointly with incomes exceeding $450,000.
- The standard deduction will rise to $6,100 ($12,200 for married couples filing jointly), up from $5,950 ($11,900 for married couples filing jointly) for tax year 2012.
- The personal exemption will rise to $3,900, up from the 2012 exemption of $3,800. However beginning in 2013, the exemption is subject to a phase-out that begins with adjusted gross incomes of $150,000 ($300,000 for married couples filing jointly). It phases out completely at $211,250 ($422,500 for married couples filing jointly.)
- The Alternative Minimum Tax exemption amount for tax year 2013 is $51,900 ($80,800, for married couples filing jointly). The 2012 exemption amount was $50,600 ($78,750 for married couples filing jointly). The exemption is now set to increase in the future for inflation.
- The maximum Earned Income Credit amount is $6,044 for taxpayers filing jointly who have three or more qualifying children, up from a total of $5,891 for tax year 2012.
- For individuals with over $250,000 in taxable income and joint filers having over $300,000 in taxable income, there will be phased out limitations on certain itemized deductions.
- For individuals with taxable income in excess of $400,000 and joint filers with taxable income in excess of $450,000, the dividends and capital gains federal tax rate will increase from 15% to 20%.
Business Income Tax
- Many popular but temporary tax extenders relating to businesses were included in ATRA such as Code Sec. 179 small business expensing, bonus depreciation, the research tax credit, and the Work Opportunity Tax Credit.
Social Security Payroll Tax
- The employee portion of the Social Security tax will return to 6.2%, up to the maximum wage base of $113,700, in 2013. This employee portion of the Social Security tax was temporarily reduced to 4.2% in 2011 and then extended twice in 2012 in an effort to help stimulate the economy. Employers should start withholding Social Security taxes at the 6.2% rate. The IRS has instructed that, “employers should implement the 6.2% employee social security tax rate as soon as possible, but not later than February 15, 2013. After implementing the new 6.2% rate, employers should make an adjustment in a subsequent pay period to correct any underwithholding of social security tax as soon as possible, but not later than March 31, 2013.” (Notice 1036, IRS.gov)
- The Social Security tax for self-employed individuals will return to 12.4% from 10.4%.
- The maximum estate and gift tax rate will increase from 35% to 40%. The Maryland estate tax can hover around 16% on top of that.
The ATRA sets the estate tax exemption amount at $5 million. This is the amount of money that can pass estate tax free to any individual without triggering federal estate tax. This exemption amount will be adjusted for inflation. Estates of decedents who die during 2013 actually will have a basic exclusion amount of $5,250,000, up from a total of $5,120,000 for estates of decedents who died in 2012. It should be recognized that Maryland continues to tax estates exceeding $1M.
The ATRA unifies the estate tax with the gift tax. That permits people to make aggregate lifetime gifts up to the $5 million (adjusted for inflation) estate tax exemption amount without incurring a gift tax. In addition, the generation-skipping tax exemption amount is set at $5 million (adjusted for inflation). As a result, a person can gift over $5 million during life ($10 million between spouses) and not trigger any federal transfer tax. For 2013, the annual limit for gifts to one person that may be made without using up any of the $5 million lifetime exemption, has risen to $14,000.
Portability remains and has been permanently extended. This means that a husband and wife can exempt up to $10 million (adjusted for inflation) potentially. If one spouse dies and does not use any or only a portion of his or her $5 million (adjusted for inflation) exemption, provided the proper elections are made, the unused exemption amount is transferred to the surviving spouse.