When all the talk in the media was about the “fiscal cliff,” the issues at stake were a list of expiring taxes and congressionally mandated spending cuts. The expiring tax issues were mostly addressed in the American Taxpayer Relief Act of 2012. The law made a number of changes to existing tax rules, while also maintaining some important rules that have an impact on many taxpayers. The Pennsylvania Institute of Certified Public Accountants (PICPA) offers an overview of what you need to know about the new rules this year.
Higher Payroll Taxes
As of Jan. 1, 2013, you may have noticed a slight drop in your take-home pay. That was due to the expiration of a temporary 2 percent cut in the employees’ portion of the Social Security payroll tax. It is now back to 6.2 percent on income up to $113,700 in 2013. The impact on a couple with each spouse earning $50,000 will see their total taxes go up $2,000 a year. In addition, some taxpayers with income in excess of $250,000 may also have to pay a new 0.9 percent Medicare surtax .
Top Earners Will Pay More
Most Americans’ tax rates remained the same under the law for 2012, but for 2013 there is a new 39.6 percent rate for high-income individuals, a higher rate on capital gains and dividends, and a new 3.8 percent addition to income tax rates on net investment income. In addition, the phase-out levels for personal exemptions and itemized deductions have changed for some higher-income taxpayers.
AMT Issues Addressed
Many middle income taxpayers had been increasingly threatened by the alternative minimum tax (AMT)that was created to prevent high-income individuals from avoiding taxes. The problem was that the AMT threshold was never adjusted for inflation, even as inflation pushed more middle income people into its range. Congress has generally passed last-minute patches to address the problem every year, but the new law permanently indexes the AMT to inflation.
New Estate and Gift Tax Rules
The new law brought some temporary stability to estate and gift taxes, but long-term planning is still necessary. The estate and gift tax exclusion remains at an inflation-adjusted $5 million ($5.12 million in 2012 and $5.25 million this year). The top tax rate was raised to 40 percent from 35 percent as of Jan. 1, 2013. However, those rules are set to expire at the end of this year, so be sure to consult with your CPA about prudent estate planning steps. Elsewhere, the newly permanent estate tax portability election allows a surviving spouse to use a deceased spouse’s unused exemption amount.
Good News for Families
Families will be happy to hear that the child and dependent care credit has been made permanent, along with the $1,000 child tax credit and the adoption credit. In addition, the earned income tax credit has been extended through 2017 for lower-income families with three or more children.
Many Kinds of Relief Retained
Relief from the commonly termed marriage penalty was made permanent, and joint filers now have a larger standard deduction. Many deductions for education expenses set to expire at the end of last year will also remain in place under the new law, including a deduction for qualified education expenses, which was extended through 2013. Emergency unemployment benefits stay in force through the end of the year, and if you’re one of many Americans having trouble paying a mortgage, or whose home value is now lower than the original purchase price, you can rely on another year of tax relief in the event of a loan modification or short sale.
Consult Your Local CPA
From retirement, to estate planning, to your current paycheck, recent tax changes have had an impact on most Americans. This article merely provides an overview of some key provisions, but your local CPA is someone who can provide in-depth information on any question about taxes or other financial concerns. To find a CPA in Pennsylvania by location or area of expertise, visit the CPA Locator