Early in 2013, the 2012 Taxpayer Relief Act was enacted and the “Bush-era” tax cuts, which were scheduled to sunset at the end of 2012, were permanently extended and modified. Because of the many permanent changes, we are able to implement a planning strategy for you that optimizes current tax benefits, yet still allows some certainty when planning for future years.
PERMANENT GENERAL TAX PROVISIONS
Income tax. The lower income tax rates of 10, 15, 25, 28, 33, and 35 percent are made permanent, and a new tax rate of 39.6 percent is imposed on taxable income over a threshold amount. For 2013, these threshold amounts are:
- $450,000 for married taxpayers filing jointly and surviving spouses
- $225,000 for married taxpayers filing separately
- $425,000 for heads of households
- $400,000 for single taxpayers
Marriage penalty relief. The basic standard deduction and the size of the 15 percent income tax bracket for a married couple filing a joint return remain twice the size as that for a single taxpayer.
Capital gains tax. The favorable rate of zero percent for taxpayers in the 10 and 15 percent brackets remains unchanged. The 15 percent rate for taxpayers is now applicable to those in the 25, 28, 33, and 35 percent brackets, and a new 20 percent rate applies to higher-income taxpayers that are subject to the 39.6 percent income tax rate.
Also remaining unchanged are the 25 percent rate for unrecaptured Code Sec. 1250 gain, and the 28 percent rate for collectibles and gain on qualified small business stock equal to its partial exclusion. The lower rates for qualified five-year property are no longer applicable.
Tax on dividends. Qualified dividends received from domestic corporations and qualified foreign corporates continue to be taxed at the same rates that apply to capital gains. Certain dividends do not qualify for the reduced rates, including dividends paid by credit unions, mutual insurance companies, and farmers’ cooperatives.
Alternative minimum tax. Permanent alternative minimum tax (AMT) exemption amounts, which are annually adjusted for inflation, are provided by the 2012 Taxpayer Relief Act. For 2013, the AMT exemption amounts are:
- $80,800 for married taxpayers filing jointly and surviving spouses;
- $51,900 for unmarried taxpayers and heads of household, other than surviving spouses; and
- $40,400 for married taxpayers filing separately.
Exemptions for the AMT are phased out as taxpayers reach high levels of alternative minimum taxable income (AMTI). Generally, the exemption amounts are phased out by an amount equal to 25 percent of the amount by which an individual’s AMTI exceeds a threshold level. Beginning in 2013, the threshold amounts for calculating the exemption phaseout are adjusted for inflation as follows:
- $153,900 for married taxpayers filing jointly and surviving spouses (complete phaseout at $477,100);
- $115,400 for unmarried taxpayers and heads of household, other than surviving spouses (complete phaseout at $323,000); and
- $76,950 for married taxpayers filing separately (complete phaseout at $238,550).
The AMT rates (26 and 28 percent on the excess of alternative minimum taxable income (AMTI) over the applicable exemption amount) remain the same in 2013. However, beginning this year, the threshold amounts are adjusted for inflation.
You should not ignore the possibility of being subject to the AMT, as doing so may negate certain year-end tax strategies. For example, if income and deductions are manipulated to reduce regular tax liability, AMT for 2013 may increase because of differences in the income and deductions allowed for AMT purposes.
PERMANENTLY REINSTATED PHASEOUTS
Higher income taxpayers are again subject to the personal exemption phaseout and the so-called Pease limitation on itemized deductions beginning in 2013. Both of these provisions were repealed through 2012.
Itemized deduction phaseout. The return of the Pease limitation on itemized deductions (named for the member of Congress who originally sponsored the legislation) reduces itemized deductions for higher-income taxpayers. Beginning in 2013, the itemized deduction phaseout reduces itemized deductions when AGI exceeds the following threshold amounts, which will be adjusted for inflation beginning in 2014:
- $300,000 for married taxpayers filing jointly and surviving spouses;
- $275,000 for heads of households;
- $250,000 for unmarried taxpayers who are not surviving spouses or heads of households; and
- $150,000 for married taxpayers filing separately (equal to one-half of the amount for a joint return or surviving spouse, after any adjustment for inflation).
Personal exemption phaseout. The revival of the personal exemption phaseout rules reduces or eliminates the deduction for personal exemptions for higher income taxpayers. Under the personal exemption phaseout, the total amount of exemptions that may be claimed by a taxpayer is reduced by two percent for each $2,500, or portion thereof (two percent for each $1,250 for married couples filing separate returns) by which the taxpayer's AGI exceeds the applicable threshold. The same threshold limits used in the Pease limitation above apply to the personal exemption phaseout.
Every tax situation is different and requires a careful and comprehensive plan. We can assist you in aligning traditional year-end techniques with strategies for dealing with any unconventional issues that you may have. Please call our office at (302) 225-5000 or email at firstname.lastname@example.org to schedule an appointment.