Individual taxpayers
The most notable change may be higher income tax rates for upper-income filers starting in 2013. If you’re single with taxable income exceeding $400,000 or married filing jointly with income over $450,000, you’re now subject to a 39.6% maximum rate. ATRA also reintroduces limits on personal exemptions and certain itemized deductions, with thresholds of $250,000 for singles and $300,000 for joint filers. ATRA makes permanent the 15% 2012 long-term capital gains rate. Beginning in 2013, however, taxpayers with taxable income that exceeds $400,000 (singles) or $450,000 (joint filers) are subject to a 20% top rate. And keep in mind that, also beginning this year, net investment income of these higher-income taxpayers, as well as of taxpayers with somewhat lower incomes, may be subject to a new 3.8% Medicare surtax under the 2010 health care law. The tax kicks in to the extent that modified adjusted gross income exceeds $200,000 (singles) or $250,000 (joint filers). (An additional 0.9% Medicare tax also applies beginning in 2013 on earned income exceeding these thresholds.)
Business taxpayers
Among the big stories for businesses are extensions of 50% first-year bonus depreciation and enhanced Section 179 expensing. Sec. 179 allows your business to elect to expense (rather than depreciate) the full cost of qualified property placed in service during the tax year. Such expensing is subject to an acquisition limit and a phaseout — before ATRA, the 2012 limit was $125,000, with a $500,000 phaseout threshold. ATRA extends through 2013 (and retroactive to 2012) a previous $500,000 limit and $2 million threshold. And up to $250,000 of the limit can be for the cost of qualified leasehold improvement, restaurant and retail improvement property. So if you’ve been thinking of making such improvements, consider incurring the expenses this year.
Plan now To ensure you take advantage of any opportunities and minimize negative consequences, talk to your tax professional as soon as possible. And be sure to stay in touch. If 2012 taught Americans anything, it’s that further tax changes are likely in store.
AMT relief is here to stay
Among the provisions of the American Taxpayer Relief Act of 2012 (ATRA) are changes to the alternative minimum tax (AMT). Many middle-income taxpayers were at risk of owing AMT for the 2012 tax year. But ATRA permanently reinstates the AMT “patch” — not only for 2013 and future years, but retroactive to Jan. 1, 2012. The new law increases AMT exemption amounts for 2012 and calls for them to be indexed for inflation for future years. Retroactive to the beginning of 2012, ATRA also permanently allows individuals to offset AMT (and regular tax) liabilities with various nonrefundable personal credits. These changes are expected to help approximately 30 million additional taxpayers avoid AMT liability. However, many individuals will still be subject to the tax.
Other articles in the June 2013 Edition of Business Matters: