The Impact of the American Taxpayer Relief Act of 2012

            Happy New Year! We wish you all the best in 2013 and hope you had a prosperous 2012. With the New Year comes new tax laws. Please read the below information as it summarizes how these new laws may affect you.

I. Income Tax and Capital Gains Rates

            Early on January 2nd, the House passed H.R. 8, the American Taxpayer Relief Act of 2012. President Obama signed the bill later that day. This Act includes several changes to tax laws which affect payroll, employment and capital gains taxes in 2013. This act effectively maintains the reduced income tax rates adopted in 2001 and 2003 for individuals earning up to $400,000.00 and families earning up to $450,000.00. Any income above those levels will be taxed at 39.6% which is up from 35%. For single taxpayers with incomes over $250,000.00, and married taxpayers with incomes over $300,000.00 certain tax exemptions and itemized deductions begin to phase out which, it is estimated increases their tax rate by about 1%.

            The rates on long term capital gains and qualified dividends for individuals above the $400,000.00 and $450,000.00 income levels will increase from 15% to 20%. 

II. Social Security Tax Holiday Ends

            The Social Security Tax Holiday which was in effect for 2011 and 2012 has unfortunately expired. This means that the Social Security tax rate will return to 6.2%, up to the taxable wage limit of $113,700.00. The maximum Social Security tax that an employee would pay will be $7,049.40 in 2013.

            The employer Social Security tax is unaffected and remains at 6.2% also with a maximum tax for an employee of $7,049.40.

III. Increased Medicare Taxes on Incomes above $200,000 and Investment Income

            Although not affected by the American Taxpayer Relief Act, the Patient Protection and Affordable Care Act establishes a new “Additional Medicare Tax” of 0.9% that goes into effect this year. This new tax applies to single individuals earning over $200,000.00 and married couples filing jointly who earn over $250,000.00. With this said, employers must withhold the Additional Medicare Tax from all workers, regardless of marital status, on wages exceeding $200,000.00. Therefore, the normal employee Medicare tax rate, of1.45% will rise to 2.35% on earnings over $200,000.00 regardless of filing status.

            The employer Medicare tax rate remains 1.45%. There is no taxable wage limit for Medicare taxes.

IV. Changes to Section 125 Cafeteria Plan

            Prior to 2012, employers could withhold up to $230.00 a month on a pre-tax basis in order to account for mass transit benefits. This amount was decreased to $125.00 on January 1, 2012, while a similar provision for parking expenses increased to $240.00. Parity for pre-tax treatment of employer-provided mass transit and parking benefits was retroactively extended by the American Taxpayer Relief Act from January 1, 2012 through December 31, 2013. The Act will also retroactively extend the employer wage credit for differential wage payments to employees who are active military reservists, through December 31, 2013, as well as the Work Opportunity Tax Credit.

            The exclusion for employer provided adoption assistance is made permanent by the Act and the expanded exclusion for employer-provided educational assistance will be made permanent, permitting up to $5,250.00 per year to be excluded from income and employment taxes, including undergraduate and graduate education.

IV.      The $5 million Estate and Gift Tax Exclusion Survives

            The American Taxpayer Relief Act preserved the $5 million that every person can be exempt from US Estate & Gift Tax.  There is an added benefit, it was adjusted for inflation so that a single person may pass up to $5.12 million tax free and a married couple may pass up to $10.24 million tax free if proper planning tools are used.  Although the top estate tax rate was increased from 35% to 40% the reversion of the exemption to $1 million was avoided.  These transfers may be made during life or at death or in any combination up to the exemption amounts noted.  Further, these provisions have been made permanent so we will no longer have the year-end drama we experienced in 2009 and 2012.  

            There is still no federal estate tax on transfers between spouses, so upon the death of the first spouse no estate tax is due.  If the estate of the first spouse to pass away is less than $5 million, the surviving spouse can use the unused balance of the first spouse’s personal exemption in his or her estate so that the husband and wife can pass the total of $10.24 million.  In order to take advantage of this portability, the executor of the first spouse to pass away must file a federal estate tax return to transfer the balance even if no estate tax is owed.

            The IRS expects you to keep track of and report gifts made during life by filing gift tax returns so that it will know how much of the personal exemption amount you have used by the time you die.  Therefore, if you give away $1 million during your life, you will have $4.12 million to use at death.

            Not all gifts need to be reported to the IRS.    You can now give another person $14,000.00 per year without it counting against your $5.12 million lifetime exemption.  Spouses can combine this annual exclusion to double the size of the gift and can give gifts up to the limit to as many people as they want.  As long as each gift does not exceed the limit per donee, none of the gifts need to be reported nor counts toward the $5.12 million exemption amount.

            For example, a husband and wife could give a combined gift of $28,000.00 to their son, $28,000.00 to his wife and $28,000.00 to each grandchild every year and not have it count toward their exemption amount.

              Hopefully this alert has been informative and helpful. Please contact Keith B. McLennan, Esq. if you have any questions regarding the American Taxpayer Relief Act or any other legal need.  We wish you much success in 2013.

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