Some Tax Law Changes

The American Taxpayer Relief Act of 2012  (the “2012 Act” was recently passed by Congress and signed by Obama to resolve the so-called “fiscal cliff.”  What follows is a breif summary of some of those provisions.

Income Tax and Capital Gains Rates:  Individuals with taxable income exceeding $400,000 and married couples with taxable income over $450,000 will be taxed at a top rate of 39.6% – this is UP from 35% under the Bush Era Tax Cuts.  The top tax rate on long-term capital gains and dividends for those same “high income” persons is now 20% – UP from 15%.

New Taxes Imposed Because of the Affordable Care Act (“Obamacare”):  The Affordable Care Act does contain some tax provisions that are going to take effect this year (2013) – these were NOT part of the 2012 Act but rather were added as part of the Affordable Care Act.  A new Medicare Tax of 3.8% applies to interest (but NOT to tax exempt interest from municipal bonds), dividends, rents, royalties and capital gains earned by taxpayers to the extent an individual’s adjusted gross income exceeds $200,000 ($250,000 for married individuals filing jointly).  Income from an active trade or business not primarily engaged in investment trading is excluded from this tax.   This tax will also have an effect on estates and trusts to the extent that estate or trust income is above $11,950.  In addition, the Medicare Tax will increase from 2.9% to 3.8% on wages and self-employment income in excess of $200,000 for individuals or $250,000 for married individuals filing jointly. [At the present time, the differential for married persons filing jointly does not apply to individuals of the same sex married pursuant to state laws permitting such marriages.]
Itemized Deductions:  Itemized deductions (excluding investment interest, medical expenses, and casualty and theft losses) will be reduced for individuals with adjusted gross income above $250,000  and for married couples with adjusted gross income above $300,000.  These itemized deductions will be reduced by 3% of the amount by which the adjusted gross income exceeds these levels, and the personal exemption will be reduced by $50 for each $2,500 that the taxpayer’s adjusted gross income  exceeds the levels shown above.

Alternative Minimum Tax:  An automatic inflation adjustment will occur annually (rather than being changed each year, as it has been for the last several years.   The  2012 automatic adjustment  increased from $33,750 to $50,000 for single taxpayers and from $45,000 to $78,750 for married couples.