For individual taxpayers
- The Act maintains permanently the reduced Bush-era income tax rates (maximum rate of 35%) for single filers earning up to $400,000, $425,000 for the head of household, and $450,000 for married filing jointly. Income above these threshold amounts will be subject to a 39.6% tax rate, and these threshold amounts will be inflation-adjusted for future years.
- For taxpayers in the top 39.6% tax bracket, the tax rate on long-term capital gains and qualified dividends will be 20%. Please note that the 20% tax rate does not include the 3.8% medicare surtax to be imposed on net investment income and gains for single filers with income above $200,000 ($250,000 for joint filers) effective January 1, 2013.
- For taxpayers not in the top 39.6% tax bracket, the rate on long-term capital gains and qualified dividends will remain at 0%, 15%, or 18.8% (including the aforementioned 3.8% surtax).
- For single filers with an adjusted gross income of more than $250,000 ($275,000 for head of household and $300,000 for joint filers), personal exemptions and itemized deductions will begin to phase out by 3% of the amount over these threshold amounts. This is a reinstatement of what was previously in the law. It will apply as follows: for adjusted gross incomes above $250,000 for single and $300,000 for joint filers, your itemized deductions (taxes, interest, charity, etc) are reduced by 3% of the difference between your adjusted gross income and a base of $250,000 for single and $300,000 for joint filers. If you are subject to the alternative minimum tax, this may have no impact on you; and in any event, is not the reduction or elimination of deductions that had been discussed in the media leading up to the actual tax bill that was passed.
- The estate and gift tax exemption and the generation-skipping tax exemption will permanently remain at $5,000,000 per person, adjusted annually for inflation. For 2013, the amount is $5,250,000, and the annual gift tax exemption amount has been increased to $14,000 per recipient.
The top estate and gift tax rate will increase to 40% permanently starting January 1, 2013. This Act also makes permanent the portability of election between spouses.
- The 2013 limits for contributions to retirement plans are increased as follows:
- IRA contributions increased to $5,500 (or $6,500 if born in 1963 or earlier)
- The income ceiling for Roth IRA contributions increased to $127,000 for single and $188,000 for joint filers
- Maximum 401(k) contributions have increased to $17,500 (or $23,000 if born in 1963 or earlier)
- Simple plans contribution increased to $12,000 (or $14,500 if born in 1963 or earlier)
- The election to make charitable donations directly from your IRA up to $100,000 in lieu of a required minimum distribution was reinstated for 2013.
- Starting in 2013, there will be a 0.9% Medicare surtax on earned income (wages and self-employment income) in excess of $200,000 for singles and $250,000 for joint filers. This only applies to employees and self-employed, not to the employer.
- Finally, the 2% employee payroll tax cut was allowed to expire at the end of 2012.
For business taxpayers
- The Act extends the $500,000 Section 179 deduction and $2,000,000 beginning phase-out amount for the acquisition of qualified property placed in service during tax years beginning in 2012 and 2013.
- The 50% bonus depreciation is also extended through the end of 2013.
- The R & D credit was reinstated for 2012 and 2013.
- The 15-year depreciation life for qualified leasehold improvements and restaurant property was reinstated for 2012 and 2013.
- For S Corporation elections made in 2012 and 2013, the tax period for built-in gains is shortened from ten years to five years. C corporation owners should definitely consider making an S election to take advantage of this provision and should be discussed with us.
This list is not complete but contains the most common provisions and those that affect the most taxpayers. Please contact us for detailed analysis if you have any questions regarding the Act or how its various provisions may impact you and your business.