Media Type: Alert
On January 2, 2013, President Obama signed legislation, allowing the income tax rate, capital gain rate, dividend rate and estate tax rate to rise for certain individuals.
Effective for 2013 returns and indexed for cost of living, individuals with adjusted gross income exceeding $250,000 ($275,000 for heads of household and $300,000 for couples filing jointly) will face a “phase-out” of their ability to benefit from personal exemptions and itemized deductions in determining taxable income. While exemptions are totally lost at $122,500 of additional income over the threshold, the phase-out of itemized deductions is less pronounced and results in a loss of $3,000 of deductions for each $100,000 over the threshold up to a maximum loss of 80 percent of itemized deductions.
Also effective for 2013 returns and indexed in succeeding years, individuals with taxable income exceeding $400,000 ($425,000 for heads of household and $450,000 for couples filing jointly) will pay at a marginal rate of 39.6 percent on income over the threshold, an increase of 4.6 percent. They will pay a 20 percent rate on “qualified dividends” and most long term capital gain instead of the prior 15 percent which remains applicable to individuals and couples in lower ordinary income brackets.
Interestingly, many taxpayers with incomes up to $750,000 will feel little effect from the increase in regular tax liability as their overall obligation will be offset by a dollar for dollar reduction in alternative minimum tax.
However, all individuals with earned income will feel the effect of the failure to extend the 2 percent social security rate cut – those with incomes in excess of $113,700 will pay an extra $2,274 in 2013. Also, as part of the previously enacted healthcare legislation, individuals with adjusted gross income exceeding $200,000 ($250,000 for couples filing jointly) will now generally pay a 3.8 percent Medicare tax on net investment income and an added 0.9 percent Medicare tax on wages and self-employment income over the threshold. Retirement distributions are not considered as investment income for this purpose.
On the estate side, the $5.12 million exemption indexed for cost of living in 2013 and succeeding years remains for estate, gift and generation-skipping tax purposes but with a 40 percent tax rate rather than a 35 percent rate on the excess. Portability of the unused applicable exemption of the first spouse remains available to the surviving spouse for estate and gift tax purposes. However, inasmuch as Maryland and the District of Columbia retain $1 million estate tax exemptions without portability, estate planning with proper documentation should remain a priority.
For business taxpayers, the current annual expensing limitation of $500,000 with a phase-out at $2 million of capital expenditures, 50 percent “bonus” depreciation, an additional $8,000 first year depreciation for vehicles and a 15-year writeoff of qualified leasehold improvements remains through 2013.
If you have any questions concerning the new tax law or have need of tax or estate planning, please call us at 301-340-2020.
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