As we anticipated the dawn of 2013, we experienced fear and trepidation related to the impending “Fiscal Cliff.” After the November election, we anxiously awaited some resolution of the issues related to the automatic imposition of spending cuts and scheduled tax increases that would take place January 1, 2013. A recession seemed imminent if Congress and the President were unable to agree on legislation to prevent the “fiscal cliff” from happening.
On January 1, 2013 Congress finally approved the American Taxpayer Relief Act of 2012, and the President signed it the following day. Since some of the provisions of the act affect almost all Americans, here are a few highlights:
1. A new 39.6% tax rate is imposed on those with income in excess of $450,000 (joint filers) and $400,000 (individuals). This will be adjusted for inflation in future years.
2. The marriage penalty has been permanently eliminated.
3 The exclusion from gross income for the discharge of qualified personal residence mortgage indebtedness up to $2million is extended through 2013. Without this provision, individuals who had their residential loans forgiven would be subject to “phantom” ordinary tax on the amount forgiven.
1. The deduction for state and local general sales tax in lieu of state income tax is extended through 2013.
2. The deduction for certain expenses of elementary and secondary school teachers is extended through 2013.
3. The “above the line deduction” for qualified tuition and related expense is extended through 2013.
CAPITAL GAINS AND DIVIDENDS
The capital gains and dividends rate rises to 20% ONLY for those who have income greater than $450,000 (joint) and $400,000 (individual). For all others it remains at 15% and is 0% for those in 10% or 15% tax brackets. The higher 20% rate will only be imposed on those gains, together with other income, that create taxable income in excess of those sums.
The estate and gift tax rates/exemptions have once again been unified. The Act permanently
creates an inflation-adjusted $5,000,000 exemption and a top rate of 40%. For estates, any unused exemption upon the death of the first spouse is available to be used upon the death of the second spouse. This concept, called “portability,” is made permanent.
Tax-free qualified charitable distributions (QCDs) from IRA accounts to certain charities are reinstated for 2012 and 2013. This allows IRA owners age 70 ½ or older to make distributions of up to $100,000, including the RMD amount (required minimum distribution), from the IRA “directly” to the charity. No charitable contribution deduction is given but no income is recognized either. The $100,000 limit applies to each individual per year.
Relaxed distribution guidelines for 401(k), 403(b), and 457 (b) plans permit participants to convert to a Roth within that existing plan at any time. The plan must have a Roth deferral feature.
EDUCATION SAVINGS ACCOUNTS
Certain features of Coverdell education savings accounts are extended permanently, namely the maximum annual contribution of $2,000, as well as the treatment of elementary, secondary, and post-secondary school expenses as qualified expenditures.
ALTERNATIVE MINIMUM TAX
1. Alternative Minimum Tax (AMT) relief for many is made permanent through inflation adjusted exemption amounts.
2. The exemption for 2012 increased to $78,750 (joint filers) and $50,600 (single) adjusted for inflation in future years. In 2013 the exemption amounts are projected to be $80,750 (joint) and $51,900 (single).
END OF THE “PAYROLL TAX HOLIDAY”
For the last two years, wage earners had paid 4.2% instead of 6.2% Social Security tax. This “payroll tax holiday” was NOT EXTENDED into 2013, so many who receive a paycheck have seen their “take-home pay” reduced by 2%. The 6.2% tax is imposed on all wage earners up to the 2013 wage base of $113,700. Although many of these provisions are called “permanent,” it is still possible that they could change as a result of negotiations over the federal debt limit, federal spending cuts, and future tax reform. As 2013 comes and goes, we will experience the effects of this law and observe further changes made by Congress and the President to address the federal deficit and other pressing issues facing our great nation.
Please note that neither Cetera Advisor Networks LLC nor any of its agents or representatives give legal or tax advice. For complete details, consult with your tax advisor or attorney.
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This article was published in Founders FCU Open Exchange Newsletter (April 2013).