By Stephanie Onzay Moss Adams LLP
All last year, mindful of the looming fiscal cliff, tax accountants advised their clients to accelerate income, defer deductions and execute their estate plans in a frantic effort to take advantage of fast-expiring tax provisions. But then a funny thing happened: The White House and Congress came to an 11th-hour agreement that averted the cliff and preserved most of those provisions.
The key word? Most. While many taxpayers will see little or no change to their tax rates, others will see increases in a number of areas. As a result, they may end up being happy they took their tax advisers’ advice after all.
How will the fiscal cliff agreement — officially known as the American Taxpayer Relief Act of 2012 — affect you? Let’s go step by step.
The 10 percent to 35 percent tax brackets were left intact, but beginning in 2013 taxable income that exceeds $400,000 for single filers and $450,000 for married filers will be taxed at a top marginal rate of 39.6 percent.
The vast majority of us will still be taxed a maximum of 15 percent on long-term capital gains and qualified dividends. But those with incomes in the 39.6 percent tax bracket will be taxed at 20 percent. Individuals with taxable income greater than $200,000 ($250,000 for married couples filing jointly) will be subject to an additional 3.8 percent Medicare surtax on net investment income.
If you’re considering selling an investment property or rebalancing your investment portfolio, there are ways to avoid the surtax and the 20 percent capital gains rate. Consider structuring your sale in installments or engage in capital loss harvesting.
The following tax deductions were extended through 2013:
Itemized deduction for state and local sales taxes;
Itemized deduction for qualified home mortgage insurance premiums;
$250 deduction for teachers’ out-of-pocket classroom expenses;
Tuition and fees deduction of up to $4,000 of qualifying expenses;
Credit for nonbusiness energy property;
Tax-free charitable IRA distribution of up to $100,000;
Ability to exclude up to $2 million of home debt forgiveness.
The following tax deductions have been made permanent:
Income exclusion for adoption assistance;
$1,000-per-child tax credit;
Expanded child and dependent care credit;
Expanded adoption credit;
Student loan interest deduction.
In addition, if your adjusted gross income exceeds the threshold of $250,000 ($300,000 for married couples who file jointly), your itemized deductions could be reduced. However, careful planning might help you avoid this fate.
The much-anticipated Alternative Minimum Tax exemption was increased and indexed for inflation. Without this increase, many more taxpayers would have paid AMT in 2012 and beyond. Top investment and AMT rates and exemptions:
2012 2013 on
Long-term capital gains: 2012, 15 percent; 2013 on, 23.8 percent
Qualified dividends: 2012, 15 percent; 2013 on, 23.8 percent
AMT exemption, married couples filing jointly: 2012, $74,450; 2013 on, $78,750
For those who didn’t get around to making sizable gifts in 2012, there’s good news: Historically low estate and gift tax rates essentially remain unchanged in 2013, giving you another opportunity to draft an estate plan that’s both tax efficient and doesn’t financially burden your heirs. Estate and gift tax rates and exemptions:
Gift tax rate: 2012, 35 percent; 2013, 40 percent
Estate tax rate: 2012, 35 percent; 2013, 40 percent
Estate tax and lifetime gift exemption: 2012, $5.12 million; 2013, $5.25 million
Generation-skipping trust exemption: 2012, $5.12 million; 2013, $5.25 million
Portability of estate tax exemptions between spouses? Yes in 2012 and 2013.
Stephanie Onzay has more than 15 years of experience providing tax solutions to family businesses and their owners. She can be reached at 425-303-3130 or firstname.lastname@example.org.