Below are some highlights of the Act that was passed and how they might affect you or your family. While the summary is not all inclusive, it should give you some tax planning tips to discuss with your Financial Advisor at Appropriate Balance and/or your CPA.
Individual Tax Rates
The marginal tax rates under the previous law are still applicable. However, a new top rate of 39.6% has been enacted for individuals who have income over $400,000, $425,000 for heads of household and $450,000 for married taxpayers.
Capital Gains and Dividends
For most taxpayers, the 15% rate for long term capital gains remains the same. For those in the 10%-15% tax bracket, the rate remains at 0%. However, a 20% rate is applied to individuals whose income exceeds the tax thresholds above.
Taxpayers with incomes over $200,000 ($250,000 for married) will be subject to an additional Medicare tax of 3.8% on investment income and 0.9% on wages and self-employment income.
Phase out for Itemized Deductions and Exemptions
Itemized deductions and exemptions will be phased out for individuals above $250,000 adjusted gross income (AGI), $275,000 for heads of household and $300,000 for married couples. Itemized deductions will be reduced by 3% of the amount AGI exceeds the threshold amounts and Exemptions will be reduced by 2% for each $2,500 which exceeds the threshold amounts. The maximum reduction for itemized deductions is 80% of total itemized deductions.
Expiration of Social Security Tax Reduction
The payroll tax for Old Age, Survivors and Disability Insurance Tax (“OASDI”) was temporarily reduced from 6.2% to 4.2% in January of 2011. This reduction expired on 1/1/2013 and the payroll tax deduction will revert back to 6.2%.
Tax-Free IRA Distribution for those over 70 1/2
Tax free distributions of up to $100,000 can be made directly from a retirement plan to a charity for 2012 and 2013. Since 2012 has already passed, there is a special rule where individuals can use distributions made in December and transfer them to charities in January 2013. Also, for individuals who for some reason forgot to take their 2012 required minimum distribution, they can take their distribution in January 2013 and not be penalized.
Estate and Gift Tax Exclusion
The exclusion amount stays at $5 million (indexed for inflation) but the top tax rate is increased from 35% to 40%.