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THE NEW AMERICAN TAXPAYER RELIEF ACT: HOW MUCH RELIEF IS IN IT FOR YOU?

By Michael Bohigian, EA

The American Taxpayer Relief Act of 2012 rescued the vast majority of Americans from the tax edge of the “fiscal cliff” and the steep tax increases scheduled to kick in as the Bush tax cuts expired at the end of 2012. This legislation, however, did not entirely spare high-income earners. Here are the key provisions of the Act passed on the first day of 2013, how they may affect you, and strategies you can implement to minimize your tax burden under these new rules:

On The Income Side:

Top Marginal Rate Increases to 39.6%

Beginning on January 1, 2013, the Act raises the top federal marginal income tax rates from the 35% max in place since the Bush tax cuts to 39.6% for taxable income above the following thresholds: $400,000 for Single filers; $425,000 for Heads of Household; $450,000 for Married Filing Jointly and qualifying surviving spouses; and $225,000 for those Married Filing Separately. Translating this provision into real numbers, a married couple with $600k of taxable income will now pay just under $7,000 in additional federal income taxes in 2013 than they did in 2012, while an individual earning at the same income level will pay just over $9,000 more in federal income taxes.

Increase in Federal Income Taxes For 2013 Due To The 39.6% Tax Rate

Taxable income Single Head of Household Married Filing Joint Married Filing   Separate
$600,000 $9,200 $8,050 $6,900 $17,250
$800,000 $18,400 $17,250 $16,100 $26,450
$1,000,000 $27,600 $26,450 $25,300 $35,650

New Investment Tax Rates

Starting in 2013, the top tax rate for dividends and capital gains is permanently set at 20%, a whopping one-third increase from the top rate of 15% in place since 2003, starting at the same income levels as the 39.6% tax rates. The tax rate for dividends was set to revert to one’s marginal tax rate per the pre-2003 Bush rules, so the Act provides some relief to high-wage earners with substantial corporate dividend income.

Keep in mind that the Affordable Care Act enacted an additional Medicare tax of 3.8% on unearned income for married couples with adjusted gross income (AGI) over $250,000 and individuals with AGI over $200,000, effective January 1, 2013. Unearned income includes interest, dividends, capital gains, annuities, royalties, and rents.

Tax Rates for Capital Gains and Qualified Dividends – 2012 vs 2013

Single Married Filing Jointly Capital Gains and   Qualified Dividends -2012 rates Capital Gains and   Qualified Dividends -2013 rates Increase in Tax Rates   on Investments 2012 vs 2013
$0 – $36,250 $0 – $72,500 0% 0% 0%
$36,250 – AGI of   $200,000 $72,500 – AGI of   $250,000 15% 15% 0%
$200,000 – taxable   income of $400,000 $250,000 – taxable   income of $450,000 15% 18.8% 3.8%
$400,000+ $450,000+ 15% 23.8% 8.8%

If you’re concerned about paying higher taxes on the sale of your personal residence, please note that the first $500,000 of gain on your home for a married couple and $250,000 of gain for unmarried individuals is exempt from all taxes, including this 3.8% Medicare surtax, when your home qualifies for the residence gain exclusion. To qualify, you need to own your home and use it as your primary residence for two out of the five years prior to the date the home is sold.

Stay tuned for Part 2 – What’s Being Deducted from your Deductions

Michael Bohigian, EA, is a staff accountant atSchwartz & Schwartz PC with a MS in Accounting and an MBA from Boston College.

 

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