By George A. Mueller III
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.