On January 2, 2013, President Obama signed the American Taxpayer Relief Act of 2012 (“the Act”) into law. The Act gives clarity, for the present, to the Federal tax system. Outlined below are some of the key changes for 2013.
· Under the Act, the gift, estate, and generation-skipping transfer (GST) tax exemptions are permanently set at $5,000,000 (indexed for inflation since 2010). The inflation-adjusted exemption amount in 2012 was $5,120,000. The inflation-adjusted exemption for 2013 has yet to be announced.
· The highest marginal gift, estate, and GST tax rates were increased from 35% to 40%.
· The Act makes “portability” a permanent part of the estate tax regime. Portability allows a surviving spouse to use any unused portion of the first spouse to die’s exemption for transfers during the surviving spouse’s lifetime and at death.
· All other transfer tax provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 are permanently enacted.
· In addition, although not related to the Act, the annual gift tax exclusion amount was increased to $14,000 per donee for 2013. The amount that can be gifted transfer tax free to a non-citizen spouse was also adjusted for inflation and increased to $143,000 for 2013.
· The maximum marginal income tax rate was increased to 39.6% for individuals earning $400,000 or more and married couples filing jointly with combined incomes of $450,000 or more in 2013. For all other taxpayers, the previous maximum rate of 35% remains in place.
· The tax rate on long term capital gains and qualified dividends was also increased to 20% for individuals with incomes of $400,000 or more ($450,000 for married couples filing jointly). For all other taxpayers, the previous maximum rate of 15% remains in place.
· The Pease limitation on itemized deductions was reinstated for individuals earning over $250,000 ($300,000 for married couples filing jointly). The Pease limitation reduces the amount of allowable itemized deductions by 3% of the amount by which the taxpayer’s adjusted gross income exceeds a specified threshold, up to a maximum reduction of 80% of itemized deductions.
· Under the Patient Protection and Affordable Care Act, taxpayers earning more than $200,000 ($250,000 for married couples filing jointly) are subject to a 3.8% additional tax on Net Investment Income.
· There is also an additional Medicare tax of 0.9% for all taxpayers earning wages and compensation more than $200,000 ($250,000 for married couples filing jointly).
Social Security Payroll Tax
· The payroll tax cut that had been in place for the past two years expired, raising the rate from 4.2% to 6.2% on the first $113,700 of wages.