The 2012 ACT retains this 15 % LTCG rate and 0 % LTCG rate for low income taxpayers. However, single taxpayers with taxable income above $ 400,000 or married filing joint above $ 450,000 are subject to a 20 % tax rate on their LTCG income.
Qualified Dividend Tax Rates Prior to 2003, dividends were taxed the same as interest income. They were subject to the taxpayer’ s marginal tax bracket, which could be as high as 35 %. Since 2003, qualified dividend income was given the same preferred tax rate as LTCG income. The 2012 ACT retains the LTCG rate for qualified dividends.
Itemized Deduction And Personal Exemption Phaseouts Prior to 2010, higher income taxpayers would lose all or a portion of their itemized deductions and personal exemptions if their adjusted gross income exceeded certain thresholds. From 2010 – 2012, these phaseouts were eliminated thereby giving higher income taxpayers full benefit for their deductions.
The 2012 ACT did not continue the elimination of these phaseouts. The phaseout will be applicable starting in 2013. They will affect single taxpayers with adjusted gross income over $ 250,000 and married filing joint over $ 300,000.
Alternative Minimum Tax The Alternative Minimum Tax,( AMT), was enacted about 30 years ago with specified exemption amounts. The original intent was to make sure about 150 wealthy individuals paid their fair share. The legislation contained exemptions designed to protect the middle class. The exemption amounts were never indexed for inflation, creating a situation requiring Congress to pass new legislation every year to avoid subjecting millions of middle class Americans to the increased tax.
AMT is computed at different tax rates than regular income tax and without many income tax deductions such as state and local taxes, medical expenses, and miscellaneous itemized deduction. The American Taxpayer Relief Act of 2012( ATRA) adjusted the exemption amounts and indexed them for future inflation. The ATRA also provided for the Child Tax Credit to be claimed against AMT.
Child Tax Credit The Child Tax Credit( CTC) was due to expire; however, the ATRA eliminated the sunset provisions, thereby allowing the Child Tax Credit to continue.
Healthcare Act of 2010 The Healthcare Act of 2010, otherwise known as Obamacare, is to be funded primarily by two tax law changes, both of which took effect January 1, 2013. The first is an additional. 9 % Medicare Tax on earned income. Previously, individuals paid up to a 2.9 % Medicare Tax on their earnings, 1.45 % if you are an employee receiving Form W-2, where your employer then picks up the remaining 1.45 %, or the entire 2.9 % yourself if you are self-employed. Beginning January 1, 2013, those with W-2 income reaching $ 200,000 will see an additional. 9 % of their earnings above $ 200,000 withheld. Self-employed individuals will pay 3.8 %( 2.9 +. 9) on their earnings above the threshold.
The second tax change to fund Obamacare that went into effect January 1, 2013 is a tax on a net investment income of 3.8 % for individuals, and estates and trusts with income over $ 200,000($ 250,000 if married filing joint; $ 125,000 if married filing separate). This new tax is called a Medicare Tax, but it is the first medicare tax to be assessed on OTHER THAN earned income. As such, those individuals living off of unearned income, such as retired individuals, may see a tax liability that they were unable to plan for before they retired.
How Does It Affect You? The new 3.8 % Medicare Tax on net investment income applies where income is in excess of the threshold amount and can be explained with the following example:
In 2013, an individual taxpayer has earned income of $ 160,000 and investment income of $ 70,000. The sum of the two equals $ 230,000, which exceeds the $ 200,000 threshold for the 3.8 % tax by $ 30,000. The 3.8 % tax applies to the lesser of the excess over $ 200,000 or the amount of investment income.
Since the former is $ 30,000 and the latter is $ 70,000, the 3.8 % tax is calculated on the $ 30,000 and the taxpayer will owe an additional Medicare Tax of $ 1,140 for 2013. Note that the result would be the same if this were a retired individual with $ 230,000 of unearned / investment income.
Medical Expense Deduction Unrelated to Obamacare but still a“ medical” tax law change taking effect in 2013 is the AGI threshold for deducting medical expenses. Previously, only that portion of medical expenses exceeding 7.5 % of adjusted gross income( AGI) was deductible. Beginning with tax year 2013, only that portion of medical expenses exceeding 10 % of AGI will be deductible.
Business Tax Provisions Of the many business tax provisions that were extended or changed affecting tax years 2012 and 2013, those most likely to affect the majority of business owners are the depreciation rules. For 2012 and 2013, the Internal Revenue Code Section 179 deduction limit is raised to $ 500,000, up from $ 139,000 previously. Bonus depreciation, previously allowed at 100 % for new assets, drops to 50 % for 2012 and 2013.
Estate Tax Provisions The 2012 Act permanently( meaning until it changes) provides for a maximum estate tax rate of 40 % for estates of decedents dying after 2012, with an exclusion of $ 5 million, adjusted annually for inflation using 2010 as the base year. The exemption amount for 2012 is $ 5,120,000. The inflationadjusted exclusion amount for 2013 is $ 5,250,000. The Act also provides a 40 % tax rate and a unified estate and gift tax exemption of $ 5 million( inflation adjusted) for gifts made in excess of the annual exclusion starting after 2012. The annual gift exclusion goes up to $ 14,000 in 2013.
In addition, the Act continues and makes permanent the portability election between spouses. This provision allows for the transfer of any unused applicable exclusion of the decedent’ s estate to the surviving spouse.
California does not have an estate gift tax.
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