Congress took the nation to the very edge of the fiscal cliff before passing a few critically important measures. To refresh your memory, the fiscal cliff was created in 2011 by Congress as a way to kick down the road (to New Year’s Eve in 2012) a can full of certain politically contentious issues.
It was set up so that a lot of bad things would happen if Congress did nothing, such as automatic tax increases and automatic spending cuts. Unfortunately, the political climate did not improve in those 18 months, and compromise became increasingly difficult.
Changes to Tax Rules
At the last minute, perhaps to avoid being responsible for tax increases, Congress eliminated the automatic expiration of the Bush era tax cuts except for those individuals making more than $400,000 or couples making more than $450,000. Congress addressed the spending cuts part of the problem by kicking that can down the road into March 2013. So, it seems we will be blessed by many of the same arguments in a few months.
In 2013, the top income rate will increase to 39.6% (from 35%) on ordinary income and to 20% (from 15%) on capital gains and qualified dividends. Moreover, the Affordable Healthcare Act implemented a new surtax of 3.8% that will be imposed on investment type income and gains for the same high-income taxpayers, increasing the tax on investment income to a maximum of 23.8%. In addition, there will be new limits on the deductions for personal exemptions and itemized deductions. Finally, the 2% reduction in payroll taxes temporarily enacted in 2008 was not extended.
Several individual provisions were extended into 2013, including qualified tuition expenses and education credits, mortgage insurance premiums treated as qualified residence interest, distributions from IRA’s for charitable purposes, sales tax deduction in lieu of state income taxes, and an inflation adjustment fix to the Alternative Minimum Tax (AMT) liability.
Business income tax rates are not changing. There were a few provisions that were extended or modified. They include research tax credits and production tax credits, certain energy credits and more generous expensing of property and equipment extended through 2013.
We would be happy to help you apply the new rules to your estimated 2013 tax liability for calculating withholding and estimated payments.