How the American Taxpayer Relief Act of 2012 impacts your 2013 taxes.
On January 2, President Obama signed the American Taxpayer Relief Act of 2012, which has resolved, or at least averted, what was widely known as the fiscal cliff. We’ve now survived the second of two potential disasters (the 12/21/12 end of the Mayan calendar was the first), and the stock market seems to be reacting favorably to the new law. While paying more taxes is bad news, many of the new tax rules became permanent, so you’ll know what to expect in the future. Also, these increases are better than what would have happened if we went over the fiscal cliff.
Here is how the new law (as well as some 2012 laws) will impact your 2013 taxes. Contrary to campaign promises, if you pay taxes in 2013 you will feel at least some impact. Higher wage earners will feel the most pain.
Here is a break-down of the various changes that may impact you and your taxes:
If you have wages in 2013:
- You will have to pay an additional 2% on your first $113,700 of income. The Social Security tax reduction was not renewed, costing each tax payer up to $2,274.
If you make over $250,000, or $300,000 for joint filers, add this:
- The Personal Exemption Phaseout is now back in effect, so total exemptions are reduced by 2% for each $2,500 over that income threshold.
- The “Pease” limitation has also been reinstated, meaning that your itemized deductions over the above-mentioned thresholds may be reduced by 3%, up to a maximum of 80% of the total amount of deductions.
If you make over $400,000, or $450,000 for joint filers, add this:
- Your income tax rate over $400K/450K increases from 35% to 39.6%.
- Qualified dividends and capital gains taxes increase from 15% to 20%.
Here are some other important updates about this and other recent legislation:
- The Alternative Minimum Tax (AMT) patch was made permanent, with higher exemption amounts, and built-in annual inflation increases. This will keep an estimated 30 million taxpayers below AMT thresholds.
- Taxes on inherited estates over $5 million will increase from 35% to 40%.
- Tax credits that were part of the stimulus plan have been extended, including the college tuition credit, earned income tax credit, and child tax credit.
- Don’t forget about the Affordable Care Tax to pay for Obamacare, which starts in 2013. If you qualify, you will pay an additional 0.9% of Medicare payroll tax and up to 3.8% more tax on net investment income.
Finally, a number of business tax credits and breaks were also extended, including:
- Maximum $500,000 deduction for certain small business property and software (Section 179 deduction).
- 50% first-year bonus depreciation of qualified new equipment.
- Research and development tax credits.
- The 15-year straight line depreciation cost recovery provision for those who make improvements to rental property, restaurants, and retail establishments.
Assessing the impacts to your 2013 taxes
This is not an exhaustive list, and adjustments may impact your actual results, but it should give you a general idea of what to expect as you project your 2013 tax liability. Give us a call so we can review your specific financial situation and help you plan for 2013 and beyond. Because of the last-minute change, your payroll taxes will most likely not be adjusted until February. This means that you will be playing catch-up for at least a portion of 2013.
We will continue to provide updates as new information becomes available on the impacts of American Taxpayer Relief Act of 2012
Neal Bach, CPA
Grady Allen, CPA