By Amy Smith
Congress passed the American Taxpayer Relief Act of 2012 (ATRA) with barely an hour left on New Year’s Day. A number of changes came out of the act that will affect your overall tax bill and financial plan for 2013 and beyond. While the outcome and resolution of the fiscal cliff means higher taxes for many, we now have certainty on the tax landscape for 2013.
This month’s column summarizes the changes resulting from ATRA. I will be offering financial planning strategies in future month’s columns for you to consider in 2013 that by taking action where appropriate may help you avoid an unexpected tax bill next April.
The following highlights the most significant changes that took effect January 2, 2013:
- Income Taxes: Highest income tax bracket increased to 39.6 percent from 35.0 percent for individuals earning $400,000 or more and joint filers earning $450,000 or more a year. The maximum corporate income tax rate remains at 35 percent.
- Long-Term Capital Gains and Dividends: Capital gains and dividend taxes increased to 20 percent from 15 percent for individuals and families in the new 39.6 percent tax bracket.
- New Medicare Taxes: As part of the healthcare reform bill, an additional 3.8 percent Medicare surtax on investment income for individuals earning more than $200,000 a year and join filers earning more than $250,000 per year took effect as well as a 0.9 percent surtax on wages in excess of the same thresholds.
- Roth 401(k) Conversions: Greater flexibility for in-plan Roth conversions in 401(k)s, 403(b)s and 457 plans.
- Personal Exemptions: Personal exemption phase outs were reinstated with exemptions reduced by two percent for each $2,500 of income that exceeds a threshold of $250,000 for individuals and $300,000 for joint filers.
- Itemized Deductions: The limitation on itemized deductions was also reinstated, reducing the value of most itemized deductions by three percent of adjusted gross income in excess of $250,000 for individuals and $300,000 for joint filers (but no more than 80 percent of impacted itemized deductions).
- Estate and Gift Taxes: The maximum federal gift and estate tax rate increased to 40 percent with a $5,250,000 (2013) exemption amount indexed for inflation; exemption portability was also made permanent.
- Alternative Minimum Tax (AMT): Annual AMT adjustments for inflation were made permanent.
- Payroll Taxes: The 2011 temporary cut to Social Security payroll taxes was not extended, increasing them from 4.2 percent to 6.2 percent.
Amy V. Smith Wealth Management, LLC, is an independent firm. Amy V. Smith, CFP, CIMA offers securities through Raymond James Financial Services, Inc., member FINRA/SIPC. Her office is located at 161 Fort Evans Road, NE, Ste 345, Leesburg, VA 20176. (703-669-5022). www.amysmithwealthmanagement.com. Any opinions are those of Amy V. Smith and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice. 2006-2012. The information contained n this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. You should discuss any tax or legal issues with the appropriate professional.