You may have noticed, either by news media or by paycheck there are changes
with our tax laws in 2013. Coming off the 2012 election and a congressional
standoff concerning the expiration of temporary tax cuts and the impending
“fiscal cliff,” our tax laws have undergone some changes.
When combined with the staged implementation of the Patient Protection
and Affordable Care Act (PPACA) or more commonly known as Obamacare, 2013
has numerous tax changes for all taxpayers to consider.
Significant Individual Income Tax Provisions:
Significant individual income tax provisions include changes to the 2001
and 2003 income tax rates which were made permanent except for single
taxpayers with taxable income in excess of $400,000 and for joint filers
with taxable income in excess of $450,000. These individuals are now in
a new high tax bracket, the marginal tax rate has increased from 35 percent
to 39.6 percent. Furthermore, the current tax rates on capital gains and
dividends will remain the same except for single taxpayers with taxable
income in excess of $400,000 and for joint filers with taxable income
in excess of $450,000. For these individuals the capital gains and dividends
rate has been increased to 20 percent, up from 15 percent. Additionally,
legislation has reinstated limitations on the personal exemption phase-out.
The thresholds are $250,000 for single taxpayers and $300,000 for joint
filing taxpayers. These changes mean that if your income reaches the threshold,
you will not be allowed to take all of your itemized deductions and your
personal exemptions, another subtraction from your income prior to calculating
your taxes will be reduced. Lastly, 2013 provides for a permanent alternative
minimum tax fix by means of an elevated, annual indexed exemption amount,
as well as a permanently extension of certain child and dependent care
and education credits.
Significant Estate Tax Provisions:
Estate tax laws afford a permanent extension to the lifetime transfer exemption
of $5,000,000 indexed to $5,250,000 for year 2013 and so on for years
thereafter. This extension helped avoid a return to a $1,000,000 transfer
exemption; however it increased the highest marginal estate tax rate to
40 percent from 35 percent, effective on taxable assets in excess of $5,000,000.
The “portability” provision was made permanent, allowing the
unused exemption of the first deceased spouse to transfer funds the surviving
spouse, without having to set up a trust plan. Therefore, taxpayers maintain
the ability to transfer their unused gift or estate tax exemption to their
surviving spouse. Also made permanent is the extension of time to pay
estate taxes related to closely held businesses. Lastly, the annual tax-free
gift provision has increased to $14,000.
Social Security and Medicare Taxes Provisions:
As many of you may have noticed, the payroll tax holiday ended, which means
that the 2 percent reduction in Social Security (FICA) taxes has gone
away, resulting in a decrease in your net pay. Due to PPACA, the 2013
FICA tax rate for employees is now increased to 6.2 percent, along with
an additional Medicare tax of 0.9 percent for single taxpayers earning
more than $200,000, or joint filing taxpayers earning more than $250,000.
Also, there is an additional 3.8 percent tax on certain sources of unearned
income, which includes net investment income (interest, dividends and
capital gains) for single taxpayers earning more than $200,000, or joint
filing taxpayers earning more than $250,000, due to PPACA. These changes
mean that the top rate for capital gains and dividends is now 23.8 percent
if income falls in the 39.6 percent tax bracket. For lower income levels,
the rates are 0 percent, 15 percent, or 18.8 percent. As a result of the
highest marginal rate increasing to 39.6 percent, increased payroll taxes
and the unearned income tax increase, some taxpayers will experience an
overall increase in taxes in excess of 8 percent, not including the effects
of deduction and exemption phase outs and other more obscure tax changes
that may affect certain items of income.
Other Tax Provisions:
At the end of 2012, the popular deduction used by small businesses on equipment
leasing and purchases was set to decrease from a useful $125,000 to a
meager $25,000 in 2013. However, as a result of the fiscal cliff, Section
179 has not stayed at the $125,000 level, but it has increased back up
to $500,000. This provides a significant added incentive for business
to purchase or lease equipment.
The cost of new property purchased for use in a trade or business is not
deductible in the year of purchase if the property or equipment is used
for more than one year. Instead, the cost is capitalized and depreciated
over the term of its full life. However, to incentivize small businesses
to spend money on business property and to help these businesses recover
the costs of their property and equipment, small businesses can elect
to deduct property and equipment costs in the year it is incurred, instead
of over the useful life of the property. This special deduction, called
a Section 179 expense, may be made on an annual basis for all eligible
property and equipment placed into service by a taxpayer. Recent tax laws
made some significant changes to Section 179 expenses.
Also, another result of the fiscal cliff, Congress has extended the 50
percent bonus depreciation for certain qualified property through the
end of 2013. For classifying qualified property, the changes do not affect
the existing rules for what type of property qualifies for bonus depreciation.
Generally, the property must be (1) depreciable property with a recovery
period of 20 years or less; (2) water utility property; (3) computer software;
or (4) qualified leasehold improvements. Also the original use of the
property must commence with the taxpayer – used equipment is not eligible.
Lastly, for certain transfers occurring in 2013 or subsequent years, plan
provisions in an applicable retirement plan, which includes a qualified
Roth contribution program may allow participants to transfer amounts to
designated Roth accounts with the transfer being treated as a taxable
qualified rollover contribution.