As the end of the 2012 approached, Americans did not know what tax bracket they would fall in for 2013. Investors were also in the dark for the future of dividend and capital gains tax rates. These uncertainties led us to spend an inordinate amount of time discussing taxes in both November and December. On January 1st, Congress finally passed a bill that provided the framework for our tax code in 2013 and future years. In the end, all taxpayers are affected by the new law to some degree.
Here are the highlights of the major changes as a result of the new tax law:
Over the last few years, social security taxes were cut as part of economic stimulus programs. The bill passed returns these tax rates to their previous levels, which is an increase to all working income earners by 2%. This went into effect immediately, and should have reduced all workers’ net pay checks in January.
Top Federal Tax Bracket
The top federal tax bracket was previously 35% for those earning incomes greater than $388,350. As a result of the new law, those filing their taxes jointly will pay a tax rate of 39.6% on income greater than $450,000. Those single filers will pay this top rate on any income over $400,000.
The estate tax exemption amount was permanently settled at $5,250,000 plus inflation adjustments each year. This means that a person dying in 2013 can transfer up to $5,250,000 ($10,500,000 for a married couple) at death without paying estate tax. This amount is reduced by lifetime taxable gifts, however.
The tax rate paid on amounts over these exemption amounts is now 40%.
Lastly, a taxpayer may gift $14,000 annually without counting towards the lifetime gift and estate exclusion amount.
Charitable IRA Rollovers
The law allows taxpayers in 2013 who are over 70 ½ years old to directly transfer up to $100,000 from their IRAs to charity without incurring taxes. Unlike many provisions that were made permanent in the new law, this strategy is only available through December 31, 2013 unless congress acts.
In summary, please consult your professional tax accountant for further details on the new law and how it affects your personal situation. We are always happy to interface with your accountant to better understand what strategies we can employ to reduce your tax burden from year to year.