Although Congress passed the last-minute fiscal cliff tax deal in a seemingly haphazard way, many changes in the American Taxpayer Relief Act of 2012 will have both positive and negative impacts on executives, says Elizabeth Bunk, partner-in-charge of Houston Tax and Strategic Business Services at Weaver.
“Unlike the Congressional change two years ago, the American Taxpayer Relief Act of 2012 provides permanent changes to certain tax rates and exemption levels,” she says. “Therefore, we won’t be in the same situation again two years from now because many of these tax changes won’t expire. This will allow executives to plan for their future taxes with greater confidence.”
Smart Business spoke with Bunk about what executives need to know about their tax considerations for 2013.
What is the new maximum rate?
Congress added a top income tax rate of 39.6 percent for those with an annual income of more than $400,000 for single filers and more than $450,000 for joint filers. They also kept the same rates of 10, 15, 25, 28, 33 and 35 percent that were available in prior years. Therefore, executives earning above the $400,000 or $450,000 threshold will pay an additional 4.6 percent on the portion of their income that exceeds the highest bracket limit. While it was widely anticipated that income tax rates on high-income earners would increase in 2013, executives can at least be pleased that the final version of the act doubled the threshold amounts at which the 39.6 percent rate begins from the often-mentioned $200,000 and $250,000 threshold amounts.
How are capital gains and dividend rates handled?
Following the same threshold — $400,000 and $450,000 — the capital gains and dividend rates permanently increased from 15 to 20 percent. It is also important to note that higher income taxpayers will get hit by the new 3.8 percent surtax on investment income imposed by the Patient Protection and Affordable Care Act. This surtax, which applies at an income threshold of more than $200,000 for single filers and more than $250,000 for joint filers, will bring the final tax rate on capital gains and dividends to 23.8 percent.
How will health care reform impact other income?
Starting in 2013, high-income taxpayers will be subject to a brand new Medicare tax on their unearned income. The 3.8 percent surcharge applied to capital gains and dividends, as mentioned above, is applied to other investment income as well. A different set of limits — $200,000 for single and $250,000 for those married filing jointly — are the baseline for the surtax to apply. Taxpayers whose adjusted gross income exceeds the threshold will be subject to this tax. This surcharge combined with the increased maximum tax bracket could mean that some taxpayers are paying 43.4 percent on their highest levels of income.
What other provision is noteworthy?
A key provision to be aware of is the reinstatement of the phase out for itemized deductions and exemptions. Itemized deductions, which had avoided phase out during 2010 through 2012, will now be subject to severe limits, depending on income levels. Total itemized deductions in 2013 and beyond, which include real estate taxes, mortgage interest and charitable contributions, will be reduced by 3 percent of the amount by which a taxpayer’s AGI exceeds a threshold of $250,000 for single taxpayers and $275,000 for those married and filing jointly. The reduction cannot exceed 80 percent of the total deductions.
What’s the overall impact?
For many executives, these provisions are probably what they anticipated. There are certainly some negative changes in the act, but there are at least two positive results:
1. Permanent changes to tax rates, including the dividend and capital gain rates.
2. Applying the new top income tax rate to a threshold amount that is double what was originally predicted.
These positives should at least slightly raise revenue without significantly raising taxes for all Americans.
Elizabeth Bunk, CPA, CFP, is partner-in-charge, Houston Tax and Strategic Business Services at Weaver. Reach her at (832) 320-3220 or [email protected].
Our coverage of the fiscal cliff law continues next month with more insight into how these taxes will interact with those related to health care reform.
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