Tax Changes for 2013
By Greenstein, Rogoff, Olsen & Co., LLP
To Our Clients and Friends:
We have a number of tax issues to report that may affect you in 2013. Several are related to recent legislation passed by Congress, the American Taxpayer Relief Act of 2012, which was signed by President Obama on January 1, 2013:
- Individuals with taxable income above $450,000 (married filing jointly)/$400,000 (filing as single) have a federal tax rate of 39.6 percent on income over those amounts, and a 20 percent maximum capital gains rate. Below these amounts, the regular income tax rates will not increase from the 2012 tax rates for most taxpayers. (See below for additional taxes under the Health Care Act that may apply.)
- The 20 percent capital gains rate will apply only to the extent that a taxpayer’s income exceeds the thresholds above for the 39.6 percent tax rate. Below that income threshold, the 2012 15 percent capital gains rate, or lower, for low-income levels, continue to apply.
- Qualified dividends are taxed at the same rates as capital gains, based on the above thresholds.
- The Alternative Minimum Tax exemption amount is increased, as expected. The exemption amount will now, wisely, be indexed for inflation, avoiding the need for recurring “patch” legislation to prevent millions of additional, unsuspecting taxpayers from paying the AMT.
- The Social Security payroll tax increases for 2013 from 4.2 percent to 6.2 percent, reversing the 2 percent reduction in effect during 2011 and 2012.
- Marriage Penalty Relief continues, avoiding the pre-Bush-era law that created a disadvantage in some cases for joint filers versus two single filers.
- For 2013, itemized deductions are limited for married filing jointly taxpayers with income over $300,000 and other filers at other levels. This limitation was repealed in 2010, but has now returned, although the limitation starts at much higher income levels.
- Also once repealed, but returning for 2013: High-income taxpayers have a phase-out of the deduction for personal exemptions starting at adjusted gross income of $300,000 for married filing jointly taxpayers, and other taxpayers at other levels.
- The estate tax (aka “death tax”) permanent maximum tax rate on transfers is set at 40 percent, with an inflation-adjusted, $5,250,000 million exclusion for estates of decedents passing away after December 31, 2012. While not a total repeal of the estate tax, the $5,250,000 million exclusion will allow nearly all Americans to avoid concerns and tax planning for this tax. Additionally, unused exemptions between spouses was also made permanent (e.g., if your spouse did not use their exemption the unused exclusion passes to the surviving spouse.)
- The gift tax rules provide a maximum 40 percent tax rate and a unified estate and gift tax exemption of $5,250,000 million (inflation-adjusted) for gifts made after 2012.
- Subject to a high-income phase-out, the valuable Child Tax Credit will permanently remain at $1,000 per child, rather than the anticipated reduction to $500 per child.
- The Act extends through December 31, 2013, provisions allowing a tax-free distribution of Individual Retirement Account (IRA) balances to charity, with certain restrictions.
- Sec. 179 depreciation deductions continue with a limit of $500,000 with restrictions and 50% bonus depreciation was also extended.
- The annual gift tax exclusion has also increased to $14,000 for 2013.
- There are various other extensions of 2012 business and energy incentives, too numerous to cover here.
Separately, the recent healthcare legislation creates two new taxes for 2013:
- A new 3.8 percent surtax on unearned income (income earned through interest, rents, dividends, annuities, royalties, etc.) will only fall on joint filers making at least $250,000, or single filers making more than $200,000.
- An additional 0.9 percent tax on earned income in excess of $250,000 for joint filers and $200,000 for single filers to help pay for Medicare Part A.
Foreign Assets/Foreign Income
Also, separately, there are new requirements for those who own foreign assets or earn foreign income:
- There may be additional forms (often several) required for any foreign assets you own or foreign income you earn. Certain exceptions apply for small amounts.
- Even if you don’t own a bank account or other financial account, but have signature authority on the account directly or indirectly through a controlling ownership interest in a foreign corporation, partnership, trust, estate or other entity, a form is required.
- Failure to file such forms and report any related offshore income can result in additional tax, plus various penalties including a penalty of $10,000 per item (or more if negligence or willful underreporting occurs.)
Examples of foreign assets and foreign income subject to these rules include: bank accounts, brokerage accounts, stocks of large or private corporations, partnership interests, bonds, pensions, and insurance policies, including those held in non-U.S. banks or brokerage accounts. This is not a complete list, so if you have any questions or concerns regarding foreign assets or income, please inform us so we can discuss these issues.
If similar items were not reported in prior years, please inform us so we can consider with you the IRS Offshore Disclosure Program. In many cases, no additional tax may result, but full disclosure on the appropriate forms of offshore assets and income is required to avoid non-filing penalties.
Lastly, the People of the State of California passed Proposition 30 in November 2012. Proposition 30 raises the personal income tax rate on individuals making more than $250,000 ($500,000 for joint filers) per year for the next seven years.
The Prop 30 changes apply retroactively to all income earned or received since January 1, 2012. Therefore, for tax year 2012, the maximum California individual income tax rate is 12.3 percent. If the income exceeds $1 million, there is an additional 1 percent mental health tax bringing the top rate to 13.3 percent.
We hope you find this information helpful and have a prosperous 2013. We appreciate serving you.
Greenstein, Rogoff, Olsen & Co., LLP