The American Taxpayer Relief Act of 2012 was approved by Congress on January 1, 2013. President Obama signed the bill into law on January 2, 2013. The Act allows the Bush-era tax rates to sunset for individuals in the highest tax bracket, permanently “patches” the alternative minimum tax, and extends several tax credits for individuals and businesses. Below is a brief summary.
- The current tax rates will be kept in place for individuals, making less than $400,000. Incomes above $400,000 ($450,000 for married taxpayers, $425,000 for heads of household) will be taxed at 39.6%.
- Capital gains rates will be raised from 15% to 20% for taxpayers in the 39.6% bracket.
- Qualified dividends will continue to be taxed at capital gains rates for those below the 39.6% bracket.
- The estate tax rate will rise to 40% (up from 35%), with an exemption of first $5 million.
- A one-year extension of unemployment benefits will be provided.
- There will be a two-month delay on the automatic spending cuts.
- Tax credits established under President Obama’s economic recovery program will be extended.
- The American Opportunity Tax Credit (tuition credit) will be extended through 2017.
- Higher exemption amounts for the alternative minimum tax (AMT) will be made permanent, with the exemption amounts being inflation-adjusted in future years.
- Itemized deductions and personal exemptions for households will be phased out for those making more than certain amounts.
- A host of individual provisions will be extended, including the treatment of mortgage insurance premiums as qualified residence interest, deductions for state and local general sales taxes, and the above-the-line deduction for qualified tuition and related expenses.
- Key business tax breaks will be extended, such as, depreciation provisions, including bonus depreciation, and the research and work opportunity tax credits.
- There will be no extension of the 2% payroll tax deduction.
Ready For a Take-Home Pay Cut?
For two years, employees have enjoyed a 2% reduction in the FICA payroll tax. This came to an abrupt end with the first payroll check in 2013, when the FICA rate returned to 6.2% (up from 4.2% in 2011 and 2012). Self-employed (SE) individuals have a corresponding increase in their SE tax.
The maximum wage subject to the FICA tax in 2013 is $113,700 (up from $110,100 in 2012). Thus, if you make $113,700 or more during the year, the result will be a $2,274 increase in payroll tax for the entire year. Each paycheck will be reduced by 2% of your pay, until the maximum amount has been withheld. If you make less than the maximum, multiply your pay for the year by 2% to determine your tax increase.
To make matters worse, as part of the Obamacare legislation, higher income taxpayers are faced with an additional 0.9% health insurance (HI) tax. In 2013, this surtax is imposed upon wage earners and self-employed taxpayers, whose wage and self-employment income exceeds $250,000 for married taxpayers filing jointly ($125,000 if filing separately) and $200,000 for all others.
While each employer will withhold the additional tax, the employer is not required to account for other employment or both spouses working. Thus, in these situations, when the total earned income exceeds the threshold amounts, the unpaid tax must be included on the 2013 tax return.
Example: John is a single individual, who had two jobs in 2013. He earns $150,000 from one employer and $100,000 from the other. For the purposes of determining his liability for the extra 0.9% HI tax, his wages from both are added together, and to the extent that they exceed $200,000, he is subject to the additional 0.9% tax. Because he earned less than $200,000 from each employer, neither of them withheld any of the additional 0.9% tax. Because his total wages for the year were $250,000, John is liable for an additional $450 (0.009 x $50,000) in taxes when he files his 2013 tax return.
Example: A married couple, one earning $300,000 and the other $100,000, is subject to an additional tax of 0.9% of their combined incomes in excess of $250,000. In this case that is an additional 0.9% on $150,000 ($400,000 less $250,000). However the spouse earning the $300,000 will already have had the additional tax withheld on $100,000 (since additional withholdings begin at $200,000) in the amount of $900 (0.009 x $100,000). The amount of additional tax on their 2013 return will be $450 (0.009 x $50,000).
Employees in these situations may want to adjust their 2013 income tax withholding amounts, or make estimated income tax payments to account for the additional tax. Self-employed taxpayers subject to the tax will need to increase their 2013 estimated tax payments to cover the additional amount.
If you have additional questions, contact the Tax Experts at Henssler Financial: experts@henssler.com or 770-429-9166.
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