Tax Update 2013: Key Elements of the "Fiscal Cliff" Deal

On January 1, 2013, the United States Congress passed the "American Taxpayer Relief Act of 2012," legislation intended to avoid the so-called "fiscal cliff." This legislation makes sweeping changes to our tax laws, some changes permanent and others temporary.

As a service to our clients and visitors to our website, the following summary highlights the key changes resulting from this legislation. These changes are effective for the 2013 tax year.

INCOME TAX

• The top tax rate increases to 39.6% for earners in the highest bracket, defined as $400,000 for single filers and $450,000 for married taxpayers. Other tax brackets remain the same.
• The tax rate for qualified dividends and long-term capital gains increases to 20% at these same income levels. The prior 0% and 15% rates on dividends and capital gains remain the same for lower income levels. Note: taxpayers subject to the new 20% rate will also be subject to the 3.8% surtax on net investment income mandated by the Affordable Care Act.
• The Alternative Minimum Tax ("AMT") exemption is indexed for inflation - something which, absent this legislation, would have subjected millions of taxpayers to the AMT who were otherwise not intended to pay it.
• Itemized deductions and personal exemptions will be reduced for taxpayers with adjusted gross income of $250,000 for individuals, $300,000 for married couples. This reinstates a limitation that had phased out under the 2001 tax act.

These changes are "permanent," meaning they do not have a sunset provision. Of course, a future Congress can always change the law.

ESTATE TAX

• The estate tax exemption - the amount of one's estate not subject to estate tax - is set at $5.25 million per person for 2013 and indexed for inflation thereafter. The top estate tax rate increases to 40%.
• The gift tax exemption amount remains unified with the estate tax, meaning the exemption amount can be used to transfer assets during lifetime or at death.
• Surviving spouses will continue to be allowed to retain a deceased spouse's unused exemption amount - known as "portability."

As with the income tax changes mentioned above, these estate and gift changes are now "permanent."

OTHER PROVISIONS

• The new law extends for one year the exclusion from income of mortgage debt forgiveness, providing relief for those entering into short sales and those who have experienced a foreclosure.
• The new law reinstates through 2013 the ability for taxpayers age 70 1/2 and older to make charitable contributions up to $100,000 from IRAs and have those distributions count against any required minimum distribution.

The legislation makes a number of other changes related to the deductibility of sales tax, conversions of 401(k) accounts to Roth 401(k)s, various education credits, and more. Contact our office at (805) 494-3416 or info@lamiafinancial.com for more information.

This information is not provided as tax advice, but for information purposes only. Read our Disclosure page for more information.